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The benefits of a second house

26-08-2010

The State Bank of India is luring existing home loan customers to take another home 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 minimized. 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 (installment 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 present house, as owner always you 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 also 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. 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.

In general, if your present EMI is less than 20-25 per cent of your regular income, only then 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.

- The Hindu Property Plus – 14.08.2010

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