You already own a house, and are thinking of purchasing one more. Should you, or should you not? What are the things that you should keep in mind while taking this decision?
| Buying a house is a very high priority for most of us. And rightly so – buying a house when you are young has lots of benefits. (Please read “Settle early in life – buy a home when young” for more). |
But what if you already have a house of your own, and are considering buying a second one (flat / apartment / bunglow / anything) for yourself or as an investment?
Here are the seven most important things that you need to consider before taking this decision.
1. Can you afford another house?
Of course, this has to be the very first consideration.
Evaluate your current income, and you current expenses, including the EMI of your current home loan.
Also, consider the changes that you expect in your income and expenses going forward – after all, buying a house is a long term investment, and has long term implications!
Consider the additional EMI if you are going to take a housing loan for the new house. Also factor in the maintenance charges and municipal taxes for the new house.
If you are planning to rent out your second house, then of course you need to factor in the post-tax rental income as well.
Considering all this, carefully evaluate if you can financially afford to purchase a second house.
2. Do you actually need to buy another house?
Now this can be tricky!
If you are planning to buy another house purely for investment, then you need to do financial calculations about your investment and the likely rental yield as well as the possible capital appreciation.
However, you need to be very careful if you are not buying the house as an investment. You really need to think hard if you actually need to buy a house.
For example, many people consider buying a house in a vacation spot, so that they can spend their vacations there (For example, Mumbaiites prefer Lonavala).
If this is the case, consider the time you would be spending there every year, the upfront cost of the house, and the associated fixed expenses like maintenance, electricity and water bills, etc.
Then, you have to take a call – does it really make sense to buy a second house? Or is it better to stay in a hotel every vacation?
(An advantage of not buying a vacation house is that you can spend your vacations at different locations every year!)
3. Home Loan Restrictions
If you are planning to buy your second house through a home loan, please remember that the terms for a housing loan for a second house are usually not the same as a loan for the first home!
While banks finance upto 90% of the value for a first house, they might not finance more than 75% of the value of your second house.
This means that you would have to arrange for more money upfront from your own pocket.
Also, many banks charge a slightly higher rate of interest for home loan taken for a second house!
4. Home Loan Eligibility
How much home loan you ultimately get would depend on your monthly income.
Banks usually don’t like to see EMI payments go beyond 50% of your monthly take home salary.
So, the bank would consider all the loans you have taken, including your existing home loan, car loan and personal loans, and would then see how much headroom is available to you.
For example, say your monthly take home salary is Rs. 40,000. The EMI for your existing home loan is Rs. 9,000, and the EMI for a personal loan you have taken is Rs. 3,000.
Thus, the total EMIs that you are paying are Rs. 12,000. A bank would ideally not like to see the total EMI go beyond Rs. 20,000 per month for you.
Thus, you would be eligible for a home loan amount for which the EMI would come to about Rs. 8,000 per month.
You can also take a home loan in joint name along with your spouse. Please read “Advantages and disadvantages of home loan in joint names” for more on this.
5. Income tax benefits of a home loan for second house
There is a misconception that income tax benefit for a home loan (under section 80C for principal and under section 24 for the interest paid) are available only for one house.
This is not true. Income tax benefits of a home loan are also available for home loans taken for second and subsequent houses – there is no restriction regarding the number of houses.
For all the details on this, please read “Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage” and the comments below the article.
6. Income Tax – House “deemed” to be rented out
This is a very important factor, especially if you are not planning to rent out your second house.
If you possess two or more houses, for the purpose of income tax, you have to choose one of the houses as “self occupied”. Other houses are treated as being rented out, and the income from them is added to your income.
This is not a problem if you have actually rented out your second house – you just add the rent received to your income.
However, if you have not rented out your second house, it is “deemed” to be rented out.
The income from it would be the rent that can be reasonably expected from it if it is actually given out on rent. For all practical purposes, this is the market rent that the house can fetch.
Thus, you would have to add to your income an amount that you are not actually earning – and would need to pay income tax on it. This might seem harsh, but, well, this is how the law is.
So, make sure you have factored this in when you make the decision to purchase a second house.
7. Location of the house
Buying a house is not a one-time task – there are many things that you have to keep doing later on for the entire life of the house.
This would include paying the maintenance to the society, paying the municipal taxes, maintenance and repair of the house from time to time, getting the house coloured, etc.
And if you are planning to rent it out, you would need to show the house to brokers, estate agents and potential tenants from time to time.
Due to these reasons, the location of the house becomes very important. Make sure that it is located at a place that is convenient to you, and is easily reachable from your existing house.
Location also becomes very important if you are investing mainly for capital appreciation. Make sure the house is located at a place that is not saturated, and is expecting lots of development in the future.
Concluding remarks
Consider these factors while purchasing your second house, and you would be able to make an educated decision.
However, remember that these factors are only the ones that are unique for a second house – you still need to consider all the things that you would consider for buying any house.
Some of these would be:
- Price of the property
- Reputation of the builder
- Quality of construction
- Age of the building
- Legality of the building (documents, approvals, etc)
- Design and layout of the house / apartment / flat
- Amenities to be provided by the builder
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