Ensure a good rental before a second home loan

Servicing two EMIs will substantially reduce tax benefits on second flat.

The rise in disposable incomes of the salaried has prompted bankers to aggressively sell them several of their products, like credit cards and personal loans. And, now, they are approaching them to give loans for second homes.

According to reports, the country’s largest bank, State Bank of India, is wooing existing home owners with a good repayment record with a second home loan. The target age: 35 and above. The reasoning being that many of these customers have already purchased a first home and could be willing to upgrade. Or, purchase a second one as an investment.
 

TAXATION ON SECOND PROPERTY

• If the house is rented out, the income from it will get two deductions: Property tax paid and interest payout 
• The rest of the income will be added to your ‘income from other sources’ and taxed
• If the house is not rented out, the municipal rate of the area will be considered to be the rent. After the above deductions, the income will be taxed
• In case of a loss after the property tax and interest payout, the taxpayer can, if he wishes to carry it forward, offset it against gains from only a housing property any time in the next eight years 
• Alternatively, the loss can be set-off in the same year against any other gains in that year

“Only existing customers with a very good loan repayment record have been approached. Since their salaries have risen substantially, they will be easily able to service a second loan. We are also offering pre-approved car loans and credit cards to such customers,” said an SBI official.

Advantage: While a home buyer gets tax benefits up to Rs 1.5 lakh as interest payments on a first home loan, there is no limit on a second home loan. So, the entire interest payout is tax free.

Precautions
But while it does make sense in purchasing a second home, most financial planners would advise that it’s best not to put too much stress on one’s finances.

Ideally, do not take a second home loan until you have repaid the first one or reduced it substantially. Experts say it is important to maintain a healthy EMI (equated monthly instalment) to salary ratio, ideally not more than 40-50 per cent. Otherwise, your other expenses might be adversely impacted and hurt your savings ability.

Pankaj Mathpal, a certified financial planner, said while upgrading a first home could be a good option, a second property may eat into a person’s savings. Unlike buying a second property, upgrading a property is easier, as it would involve a lower cost, since the bulk of the capital is likely to come from the first property. A loan over and above this would help ease matters.

For example, if one had purchased a property of Rs 20 lakh around 10 years earlier, the price would have most likely reached Rs 30-35 lakh. Also, the major chunk of the loan would have been repaid. Purchasing a second property worth Rs 60 lakh would imply that 50 per cent of the money can be paid from the purchase of the property. The rest of the amount can be raised through a loan.

The bank, in this situation, will add the outstanding amount of the first loan with the new loan. The equated monthly instalment will also increase, but not substantially.

Check the return
But if you are purchasing a second home, it is important to identify areas where a good rent is possible. This will ensure the burden on salary is reduced substantially.

“Though buying real estate for the purpose of investing is a good idea and it is a good time to buy, as prices have still not peaked in many places, be cautious about the area you choose and your loan repayment capability,” warns Anil Rego, CEO, Right Horizons, a financial advisory firm.

In fact, if you really want to invest in property, but it is a strain on your finances, go for a smaller property like a one-room and kitchen in a good area that will fetch a decent rental.

The important thing is to remember that real estate prices may stagnate sometimes. And, the return on acquisition, especially to satisfy investment needs, has to justify the strain on finances.