You may be keen on investing in a second home for several reasons, such as having a vacation home, building a property you will use after retirement, gifting a home to your children, or to earn rental income. While you may be well-versed in taking a home loan, when you are considering a second loan to buy another property, plan your purchase carefully to have a hassle-free experience.
Take a look at 6 questions you should ask yourself before buying your second home.
- Have you selected the right property as your second home?
No matter what your purpose of buying the property is, it is always important to do your research and select a property in the right location. Be sure to also check the amenities, the neighbourhood, and connectivity of your second home. Buying the right property in the right location not only ensures that you receive a better resale value but also ensures that you will get financing for it.
- Are you considering a housing loan?
No matter what the price of your new property, if you are borrowing a second home loan to purchase a home, you may be charged relatively higher rates of interest. While the interest also depends on current interest rates, the lender you choose and your credit score, if you already have a home loan to repay, your new home loan will attract a higher interest. Keep this in mind, and calculate how well you will be able to repay both your existing home loan and the new loan you’re considering. Keep in mind that you will need to convince your lender about your ability to repay both the loans.
- Have you used the home loan interest calculator to check your home loan affordability?
Since taking on a new loan will impact your finances, do all the necessary calculations beforehand. You can easily examine your affordability by using a home loan EMI calculator. Just input your principal, tentative interest and tenor to see your EMIs. This will help you understand how much you can afford to pay as monthly instalments to service your second home loan. You can also use this figure to tweak the tenor and compare various lenders’ interest rates to pick the best loan with a nominal rate of interest. Apart from this, using this calculator will also tell you if the principal you want to borrow suits your income or not. This will help you search for your second home within your budget.
- Do you have an existing home loan?
In case you have an existing home loan, you can make repayment of this loan more affordable by seeking a balance transfer. A home loan balance transfer can introduce you to a lender with more affordable rates of interest. You can then avail another home loan with the same lender. Opt for an affordable home loan transfer and you can gain from nominal rates of interest, a top-up loan, flexible tenor and flexible prepayment options.
- Have you saved enough for down payment?
When you are purchasing a second home, you will need to plan your down payment carefully. You may be asked to pay more as down payment by your lender. It is in your best interest to pay at least 30% of the home’s value as down payment to reduce your overall interest cost and to keep your EMI’s low. So, before borrowing a home loan for a second home, it is important to ensure that you organise sufficient funds as down payment.
- Have you checked the tax benefits and rules on a second home loan?
When you buy a second home, the income tax department views it as a property that is to be let out on rent and not self-occupied. The interest payment up to Rs.2 lakh on the second home loan is deductible. If, however, the property is not constructed within 3 years of your taking the second loan, only Rs.30,000 is eligible as tax deduction. Secondly, you can claim deductions on principal repayment up to Rs.5 lakh per year if you retain ownership of your second home for at least 5 years from the day you get possession. Keeping this rules in mind will help you maximise your tax benefits on your second home loan.
Consider all these questions to make a financially sound decision when buying your second home.