Second house No more a distant dream

Banks are ready to offer loan for a second home, but do your groundwork properly before going for it, says R.P. Deshpande

The State Bank of India is luring existing home loan customers to take another loan to buy a second house. The loan is offered at attractive terms and with fewer formalities. The scheme is open to only those borrowers with an impeccable track record of repayment and lower EMIs (equated monthly instalments) than the family income now. Immaculate repayment history of the borrower means credit risk for the lender is minimised. The value of security (property mortgaged) obtained for the home loan should have appreciated multi-fold over the repayment years, while the loan amount has reduced. Thus the LTV (loan to value of property) ratio has considerably reduced, so is the credit risk. The EMIs have remained the same (if loan taken on fixed rates or slightly altered if under floating rates), whereas borrowers' income has gone up significantly (in most cases). The IIR (instalment to income) ratio has come down noticeably, thus increasing the repayment capacity of borrower. The bank had verified the credentials of the borrower and as such the administrative expenses will be less. If the borrower is looking for a loan to construct the second house on the same property for which first loan was granted, even legal verification charges are nil. Thus, it is a wise move for any bank or home finance company. It looks great to acquire a second house in many ways. Whatever may be the condition of the present house, you always thought you could have a better accommodation, which the second house can fulfil. Especially if you have two children, your spouse may suggest you to go for second house so that both will inherit houses. You can let out either the present house or the property to be purchased to augment your income to pay the enhanced EMIs. Your tax consultant will counsel that not only is investing in house property safe and lucrative but you can claim income tax concessions on the second house also.

But you may have to do a lot of home work in planning the things and face similar hardships in searching the right kind of house and right kind of home loan that you had experienced while buying the first house. You need to be more careful as in the recent years fraudulent dealings in property have increased and even home loan lenders are unable to find out the fake property documents which are in circulation. The positives If you plan properly and select the right property, it is most likely that the second house will bring you lot of prosperity in the future, as your EMIs may remain almost the same while your income, including rental income, will grow year by year. But if you make some mistake either in planning or in selecting the property, you may face hardships which may haunt you throughout life. Since you would be creating another long-term liability, you need to be extra cautious in calculating your income/probable income over years of repayment, rental income, present and future expenditure, including the ever increasing expenses on children's education and medical expenses of all family members etc. You need to be meticulous in deciding on the optimum EMI payment. As bread winner of your family, you need to insure yourself for the long term mortgage debt. In general, only if your present EMI is less than 20-25 per cent of your regular income can you think of a second home loan and further restrict your loan repayments (EMIs of both loans) to a maximum of 50-55 per cent of your present income. You will get rental income of at least 40-50 per cent of the new EMI. A major setback for the people thinking of owning a second house is that in the new tax regime starting from April 2011, one may not be eligible for claiming income tax concessions on repayment of principal.

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