Your Guide To Buying A Second Home

Going for a second home? There are so many things you need to think about! Here’s help on how to go about it, fruitfully!

We are sure you can’t wait to join the wonderful world of second homeowners! If you are thinking of buying a second home, you are not alone. There is a growing percentage of the Indian population that owns more than one house. In fact, this privilege that was reserved for the rich has now been extended to the middle class, thanks to the increase in affordable housing.

What’s more? A second home serves multiple purposes – a retirement retreat, a vacation home, or just an investment. It is estimated by real estate experts that the second-home property market is growing at 10%-12% per year. And more and more people seem to buy a home for vacation purposes.

News reports state that vacation homes in India consist of about 5%-8% of the total home sales. With real estate prices in small towns going up in the past decade, people have been rushing to make purchases in Tier II and Tier III towns before prices go up further.

Additional Reading: Avoid Real Estate Scams To Reap Rich Returns

Adding to all this is the booming property market in India. With interest rates on a downtrend, people are not hesitating to go for a second Home Loan. So, there couldn’t be a better time than now to invest in that second home. A good number and variety of second home projects have sprung up over the last 5-6 years.

However, note that the second home market is a bit inflated. This means that these properties are selling at prices that are slightly higher than what they are worth. So, you need to be careful when choosing a property as your second home. Plus, there are so many others things you need to look at. Here’s all that you need to know before you take the plunge.

Advantages Galore

• Good Investment, indeed!

  The equity market has not done well and gold seems to be middling this year. So, what other investment makes sense right now? Real estate, of course! Capital appreciation is one of the primary reasons why you should be looking at real estate as opposed to other asset classes. This is especially true for residential properties. Data shows that 80%-85% of second-home buyers are buying that property for investment purposes.

  And are the prices good enough to buy now? Let’s take the National Housing Bank’s Residex. This index tracks prices in the residential housing segment in India. If you look at this index’s movement in the last 2 years, the index has remained at 238 since mid-2014. This means that realty prices have become stagnant and this is the right time to cash in on the prices before they start rising.

  Another good thing? The interest rates! The interest on your Home Loan is now down to 8.6% per annum. So, lower EMIs for you and lower overall cost of acquiring that second home.

         Additional Reading: Currency Demonetisation To Impact The Real Estate Sector

• Tax Breaks

  This is the best part about getting a second home. There are a ton of tax benefits available even on your second home. This includes the interest payment benefits that you are claiming for your first home too. As you might know, the interest deduction is capped at Rs. 2,00,000 for a self-occupied and let-out property.

  The icing on the cake? You will be exempt from paying wealth tax (for having more than one property in your name) if the second house is let out. However, you need to let it out for a minimum of 300 days in a year. Is there any way you can gain more? Of course, there is! To make this even more advantageous, you should treat the property with higher annual value as self-occupied. This way, your taxes get reduced.

• Retirement Retreat

  There are so many advertisements on retirement homes that we are sure you know all about them. In fact, several developers are offering guaranteed rental income for these homes. No wonder, the number of people looking for such homes has grown over the last few years. The same is true for vacation homes.

  The biggest advantage of holiday homes is that they can be leased out during tourist seasons. Most people buy holiday homes in popular tourist spots. This way, they can use it as vacation home during their working years and use it as their home after retirement.

  Where are retirement homes coming up? Retirement homes are becoming popular in areas on the outskirts of Chennai, Mumbai, Delhi, and Bangalore. Apart from these, tier II cities and towns such as Bhubaneswar, Jaipur, Lucknow, Chandigarh, Coimbatore, and Nagpur are slowly becoming sought-after places for retirement homes. Vacation homes in Goa, Ooty, Kodaikanal, Shimla, and Missouri have always been trendy and still are. You can choose to let-out these vacation homes until you can use them after retirement.

• Another Income Source

  By buying a second home and renting it out, you will be receiving a steady income every month, possibly for the rest of your life. There are other ways you can earn from your second home too. How? With corporates looking at houses for accommodating their employees, you can consider leasing out your second home to companies. This can earn you handsome returns as corporates are ready to give almost twice the rent you will otherwise receive. This is, of course, if the house is fully furnished. Another option is to lease out your house as a guest house for companies. Some companies pay as much as Rs. 50,000 a month if the house is in a favourable location. Bengaluru and Kolkata are the top cities with the highest increase in rental incomes in the last 2 years.

Why And When?

There was a time when people used to buy a first home after getting married and having kids. That’s all changed now. With India being a young nation (average age is 25), the median age of a typical home buyer has declined considerably.

According to a recent study, the average age of a home buyer in India has declined from 42 years in the 1990s to about 28 today.  The same is true for a second-home buyer. Second-home buyers were a rarity several decades ago. But now, the median age of a second-home buyer is 43 years, which is close to the average age of the first-home buyer decades ago. So, more and more young people are opting for a second home.

Why is this so?

This is mainly because of the rising average salary of the Indian population. A study shows that India’s annual per capita disposable income is expected to grow at the rate of 10-13%. More money in the hands of people will mean more willingness to take loans. A higher income will also mean that the first Home Loan is usually repaid much before the close of its tenure. So, home buyers are willing to take another loan when they close off a loan. Some people consider a Home Loan after its closure just for the tax benefits it provides.

The increase in second-home buyers also has a lot to do with the higher disbursement of loans. Banks are being more proactive in granting Home Loans than ever before. They have understood that lending to the retail segment is safer than lending to corporates. That is the reason why your bank might be more willing to give you loans today than it was years ago. Consider this: Loan disbursements by housing finance companies has grown by 30%-40% annually in the last 10 years. With banks and finance companies becoming more competitive, the number of loan disbursements will only go up in the coming years.

When Do Buyers Go For That Second Home?

Studies reveal that at least one-third of homeowners go for a second home about 5-6 years after their first-home purchase. But note that ideally there should be a 7-10 year gap between two huge loans. It is also important to ensure that the loans don’t exceed 50% of your take-home pay. A lot will depend on your income, lifestyle, and other factors. It is best if you can close your first Home Loan before going in for the second one.

If you already have a Home Loan and want to go for a second Home Loan, remember that your loan eligibility will be drastically reduced. Also, banks might restrict second Home Loan eligibility to only 3-4 times your gross annual income. For example, if you already have a loan and are earning Rs. 10 lakhs per annum, banks might say that you can borrow only a maximum of Rs. 30 lakhs. These restrictions are placed by most banks because the risk of you defaulting on the loan can be high.

Another point to note is that it is not easy to get a second loan. You might be asked to pay a higher down payment amount and higher interest on your second Home Loan, especially if you have another Home Loan running. If you have been paying your present Home Loan regularly, you can try for the second Home Loan with the same bank as they know your repayment track record. There is a possibility that they might offer you a loan with good terms.

Other things that come into focus when you opt for a second Home Loan include your previous repayment track record and your other outstanding loans. As you know, banks check your credit history with Credit Information companies like CIBIL before granting loans. So, get your Credit Report and look at your Credit Score and remarks to ensure that your Home Loan does not get rejected.

Also, before applying for the loan, ensure that you don’t have any outstanding commitments that are long overdue. Note that a more recent default and one with a higher value will put you at a much greater risk than a smaller default from many years ago. You must also have a good employment record when you go in for a second Home Loan. Your employment status, type of employment, years of experience, residential status, and an increase in income levels will have a great influence on the bank’s lending decision. A good credit history, obviously, will make it easier for you to get a second loan and you might get better rates.

What Kind Of Property To Look At?

Here are some of the things you should consider when choosing a second home:

Construction Status:

This will depend on the purpose for which you are buying the second home. Most buyers look at ready-to-move-in homes for convenience. However, under-construction homes might be cheaper if you are not planning to use the house for some time. There are, of course, completion issues that might drag on. This is why you must always buy from reputed builders. Look at the builder’s track record and previous projects to get an idea as to how the builder completes their projects.

It is best to steer clear of properties with completion dates that are more than 12 months. Talk to buyers who have already purchased units in the project. You could also check reviews, often available on blogs, regarding the projects. This is even more important for second homes because they are usually situated in remote locations which lack proper infrastructure developments. This means that the onus lies on the builder to create a self-sufficient community within the project. This is usually done by including amenities such as 24/7 security, power backup, doctor on call, and a supermarket within the complex.

Component Size:

This aspect will vary based on your income and lifestyle needs. Typically homebuyers will look at buying second homes that are bigger and larger than their current home. Essentially, they are doing an upgrade. People also buy bigger second homes because these homes are in smaller towns and are cheaper. This is a good choice and will be perfect if you are looking to occupy your second home.

What is the average component size that people look at? Usually a middle or upper-middle-class Indian will look at 1,300 – 2,200 square feet (sq.ft) when buying a second home. However, if you are going to let out the second home, it is better to go for smaller-sized homes.

Another point is that the number of tenants seeking a small to medium size home is higher. The ideal component size range for such a home will be between 800 and 1,300 sq.ft.

Independent House Or Apartment:

If you are going in for a vacation home, it might be better to look at independent houses. The dimension for the plot will be 30×40 and a home that is 800-900 sq.ft built on it. If you are planning to rent out your vacation home, you can consider buying one that is already furnished. As you might know, second-hand homes are cheaper than brand new ones. If you think maintenance will be an issue, you can go for second-hand apartments that will cost you much less in terms of maintenance.

Why apartments? This is because apartments usually have associations that take care of the needs of the community like ensuring water supply, electricity, sanitation, security, and other essentials. And the costs are, of course, shared. In the case of an independent house, you will need to spend on all the basic necessities on your own, apart from handling any issues that might arise.

Where To Buy?

 This will depend on why you are buying a home in the first place.

• Your Second Home As An Investment

If you are looking for capital appreciation from your second home, go to the suburbs. The suburbs near major metros are the best place to invest for capital appreciation. Why? This is because growth within the city tends to get restricted. This is because a city has its limits!

Also, prices within city limits might be beyond your budget. Growth, in terms of capital appreciation for the land, is much quicker in the suburbs. Though social infrastructure might be a problem initially, if companies and industries are a few kilometres away, growth is bound to happen. Bowenpally in Hyderabad, K.R.Puram in Bangalore, and Old Mahabalipuram Road in Chennai are good examples. Now, these places are considered a part of the city.

• Your Second Home As A Source Of Income

If you are planning to let out your second home, it is best for you to choose areas within city limits or those areas that are close to industries and companies. This will ensure that you get good rentals and over time your property will also appreciate. But you need to first check out rentals in the area in which you plan to buy the property. A number of property portal websites will help you here. Doing this will give you an idea of what percentage of your Home Loan EMI can be covered using the rental income. The ease of buying property and the availability of reputed builders should also be considered.

• Your Second Home As A Vacation Home 

Bored of staying at hotels at your favourite vacation spot? You can consider buying a second home there. Vacation homes need to be away from the city, of course! But you can choose ones that are within a day’s driving distance from your city. It is best to buy vacation homes in destinations that are within 4-7 hours drivable distance from cities. This will help you maintain the home as you can reach it quickly in case there are any issues.

Naturally ambient locations that have a good climate are ideal. You can consider looking at self-sufficient projects that increase ease of living. After all, a vacation home with all amenities will help you relax and refresh.

• Location, Location, Location

You have heard this a billion times and will hear it a billion more. As any real estate expert will tell you, the location that you choose will ultimately decide how much capital appreciation or rental appreciation you are likely to get. Properties that are close to reputed schools, big hospitals, and popular malls always manage to do well if you are planning to let-out your second home.

Vacation spots that are near major metros are also a good destination for second homes that you want to let out. In case you plan to buy a second home for investment, IT parks and factories within driving distance will ensure development around the surrounding areas and ultimately lead to appreciation in the value of the property. But always choose a location only after extensive research.

Additional Reading: Real Estate Investing 101

Hold It

How long should you hold on to your second home? This will depend on what purpose you purchase it for. If it is a long-term investment, you should be holding on to it for at least 10 years. If you purchase it for rental income, take a call about holding it every 5 years. Note that you need to look at your financial position and the rental trends in the area before deciding what to do with the property. Also, take your goals into account before deciding to sell the property. If your second home is going to be your vacation home, a review of the property once in 5 years should be enough.

Risks Involved

There are several risks when you decide to buy a second home.

• ‘Vacant Home’ Risks

As you know, both apartments and independent houses are prone to vandalism, illegal encroachments, and other hazards if left vacant. With second homes being purchased far away from the area where you live, managing the home might not be easy. In fact, independent houses are in far more danger than apartments if you don’t have a security system in place. Apartments will have all basic amenities, including round-the-clock security. Home Insurance, alarms, and security are a must for vacant houses. Visit the house regularly to keep it clean and dust-free, or appoint someone who will do it for you.

• Interest Rate Risks

If you have a floating rate loan, interest rates might keep changing. Since interest rates are falling, it is not an issue now. But when interest rates start to rise, you might need to pay more interest on your Home Loan.

Second-Home Buyers Guide

Remember These

Here are some tips on getting that second Home Loan:

• Most financial institutions might demand a higher down payment for second Home Loans. Even though the norm is 10%, they can raise it to 25% or more.
• It is best to make higher down payments for your second loan as these loans are usually taken later in life and might be a hindrance during your years to retirement. So, the lower the loan amount, the better it is for you.
• Make sure that you take the Home Loan before you reach your 40s, especially if you are going for a tenure of 15 or 20 years. This is because in your 50s you might have major financial commitments like your child’s higher education or marriage, and the EMI could become a burden at that point in time. Another fact is that most banks require Home Loans to be closed by the time you retire, even if the tenure of the loan is longer. For example, most banks’ Home Loan terms state that the maximum loan term is 20 years or the retirement age of the borrower, whichever is earlier.
• The most important point to look at is your EMI to income ratio. This can affect your desired loan tenure. Banks look at this ratio before granting loans. This ratio reveals the percentage of your monthly income that you spend on meeting your total debt payments. This ratio should not exceed 50%. Some institutions consider 60% as the limit but for that, your monthly income needs to be higher than Rs. 1.5 lakhs. Banks also look at your bank statements to ascertain that you have enough surplus funds on hand.
• If you had taken a loan for your first home and want to take one for your second home too, go to the same financial institution. Most of them will provide sops like better interest rates and loan for woodwork. Sometimes the interest differential can be as high as 0.5%-1%. You can also use a top-up loan or loan against the property to buy your second home from the same institution.

Fix The Taxes

 Taxation can be an issue unless you know what taxes are applicable when you buy a second home. Here’s the dope:

• Principal repaid towards loan(s) taken for purchase of a residential house will be subject to the overall ceiling of Rs. 1,50,000 per year, under Section 80C of the Income-tax Act. This means that the principal repayment is limited.
• You can claim the interest paid on your second Home Loan as tax exemption if you let it out. This can be claimed under Section 24.
• Note that even if you keep the second house vacant, it will be deemed to be let out and notional rent will be computed and will become taxable.
• When a property is let-out/deemed to be let out, the annual value of such property will be the actual rent or the fair rent. What is a fair rent? This is the rent that a similar property in the same locality will get.
• Municipal taxes paid, a standard deduction of 30% and interest paid on loan will be allowed as a deduction to determine the income from a let-out house property.
• Incurred a loss on your second home? Fret not! A loss arising from house property can be set-off against any other head of income during a financial year. Want more? Here you go! The loss that’s not set-off can be carried forward for eight subsequent years. But such carried-forward loss can be set-off only against income from house property.

Where To Buy?

Capital Appreciation

Here are the areas (in top Indian cities) that witnessed a steep rise in capital values:

*For a 2 BHK apartment. Source: BankBazaar Research

Note: Prices pertain to 2016.

Rental Appreciation

Here are the areas that saw a rise in rental values:

*For a 2 BHK apartment. Source: BankBazaar Research

Note: Rental appreciation is usually more in developed localities that are closer to social infrastructures like schools, shopping malls, and hospitals

Vacation/Retirement Homes

 Here are some places which are emerging as retirement/vacation havens in India:

*Source: BankBazaar Research

Now that you have all the dope, we’re sure you’re gearing up to get that second home. Go ahead! But don’t forget to compare across lenders when going for that second Home Loan. Interest rates matter more now than ever before!