Buying a second home can be quite gratifying if you are financially prepared for making such large investment. But, we often underestimate the implication of not having a clear approach in mind while signing up for second property, especially if we have other financial responsibilities to take care of. Follow these vital tips to ensure that your second home purchase proves to be financially rewarding:
Assess your financial position
The first step towards buying a second home should be assessment of your current financial position. Buying a house demands a large chunk of money and long term commitment which is only possible if your finances allow it. In case you are planning to fund the second house through home loan, make sure you can service the loan without increasing your fixed obligation to income ratio (FOIR) beyond 50% since lenders prefer lending to borrowers with a FOIR up to 50%.However, if your FOIR exceeds 50%, then you may either opt for a longer tenure or make higher down payment to reduce EMI, and FOIR.
Some lenders may consider spouse’s income as well while computing your net monthly income. Additionally, various lenders and online financial marketplaces offer home loan EMI calculator and loan eligibility tool on their portals to ease customer’s experience while evaluating their home loan eligibility and loan’s affordability.
Purpose of purchase should anchor the location’s selection
Choose the location of second property depending on your purpose of purchasing it – as an investment, vacation home or for rental income. If you are purchasing it as source of income through rent, then the location should have a good enough rental demand and offer decent infrastructure as well, both social and physical. In case the house is being bought for vacation purpose, then a location situated closer to nature and away from the city should be ideal. And, a location offering value and high scope of capital appreciation, especially in the initial stages of development, would suit those buying it for investment purposes.
Check your credit score before applying for home loan
Lenders generally prefer a credit score of 750 and above while lending to borrowers. Therefore, in case you are planning to source funds for your second home through home loan, make sure you check your credit score before applying for loan. Reviewing your credit report periodically would help in spotting errors which could harm your credit score, if any, and getting those rectified timely from the bureau or lender. Moreover, a higher credit score could boost your chances of loan approval, along with favorable service terms and lower interest rates. You can conveniently fetch your credit report and score, along with monthly updates, through online financial marketplaces.
Don’t compromise on essential financial goals
Whether you finance your second home yourself or through home loan, make sure you don’t end up compromising with your life’s essential goals such as child’s marriage or your retirement. Do not disturb your emergency fund to pay a higher down payment, since the primary motive of this fund is to assist during financial exigencies such as job loss or severe illness, due to which your regular income stops. Ideally, your emergency fund should amount to at least 3-6 times your monthly living expenses. While choosing your EMI amount for the home loan, make sure you consider your existing EMIs, monthly contributions towards the investments or emergency fund so that you wouldn’t need to sacrifice these to fund your second home. Compromising on such essential financial goals due to aggressive repayment strategy or higher down payment would thus force you to borrow at a much higher cost in the later stages of life.
Analyze ROI prospects
While finalizing your second home, make sure you also analyze the return on investment (ROI) prospects of the property if the purpose behind your purchase is investment. ROI basically measures the investment’s performance, by measuring the return on investment through net profit, relative to the cost of investment. A higher ROI implies net returns from the investment are more than its cost. Factors such as location of property, infrastructure, availability of public transportation, rental demand, overhead costs such as maintenance or parking cost etc. greatly affect the ROI prospects of a property. Therefore, while finalizing the second home, ensure these factors look favorable for the chosen property, thereby improving the chances of higher ROI.
Understand the tax implications
The principal as well as interest paid on home loans can be claimed for tax deduction up to Rs.1.5 lakhs and Rs.2 lakhs respectively for a self-occupied property. However, if the property is not acquired or constructed within three years from the end of the financial year in which the home loan was taken, this deduction on interest would fall to just Rs.30,000. However, this period of three years has been extended to 5 years in Budget 2016 which is applicable from the financial year 2016-17.
<<The article was originally published in BW Online>>