Buying a second home - reasons and things to consider

In this day and age where the property rates are sky-rocketing, buying a second home is not everyone’s cup of tea. That said, a second home can prove to be a great investment and a worthwhile financial decision. It can provide you a roof on your head as long as you are alive, while also providing your children financial security long after you are gone. It can also be used in many ways – as a vacation home, an additional source of income and as a retirement home. Moreover, home buyers can also avail many tax benefits. Here are some reasons and tips for buying a second home.

Reasons to buy a second home

Let’s look at the top why reasons that justify the purchase of a second home

It could be a worthy investment: That the prices of real estate are increasing with every passing year, is a known fact. Property rates are escalating continuously. In such a situation, a second home can prove to be a worthy investment, especially if done prudently in localities which have a great scope for growth. Real estate investments also provide much better returns in the long term when compared to any other asset class.

It makes for a great vacation home: The trend of owing a vacation home has become popular in India, especially among the city folk who have become acclimatised to huge crowds and noise pollution. Investing in a hill-station property or a vacation spot gives you the leisure to leave the hustle-bustle of the city whenever you please. You can also list it on travel websites for travellers to reap an authentic homestay experience and earn an additional source of income from it.

It could be your retirement home: Many people come to the bigger cities from smaller towns to make their careers, but have their heart set to returning to their native place upon retirement. While your primary home can be in the city you are employed with, your second home can be your retirement home, where you move to when you are tired of city life. You can also rent, both your primary home and your retirement home when either of them is vacant and extra income.

You can earn tax benefits: Of all the reasons for buying a second home, this is the most crucial. Second home buyers can avail benefits on interest paid on the principal loan amount in same way that it is claimed on the first home. You can get interest deduction on a maximum of ?200,000 for self-occupied and rented properties. If the second house is also listed in your name, you are exempted from paying wealth tax if the house is rented.   

Things to consider when buying a second home 

While a second house can prove to be worthy investment, here are some things to consider when buying a second home.

Consider the down payment:  When it comes to a second home taken on loan, most financial institutions to tend to demand a higher down payment. While you may receive 85%-90% finance on your first home loan, with the second loan, you may have to make a down payment of 25% or higher. That said, it is better to make a higher down payment since you would be typically purchasing your second home slightly late in life and staying indebted for a huge amount and a longer tenure can affect your quality of life during your retirement years.

Consider your financial commitments: It is better to purchase the second home on loan in your late thirties or early forties, if you intend the loan tenure to be 15 to 20 years. This way, you will have sufficient number of years of employment, before you retire. Also consider your financial commitments in your fifties such as higher education cost for children or their wedding expenses. Having the burden of a huge EMI can affect these commitments. Most lenders prefer that you close off your loan before your reach your retirement.

Consider the debt to income ratio: Before granting any loan, especially one where the amounts are high, lenders prefer to check your debt to income ratio. While buying a second home, the lender will check your outstanding loans and compare them with your monthly income. If you are spending more than 50% of your income on various EMIs and debts, including credit card debts, your loan can be rejected. Therefore it is better to consider your debt to income ratio before buying a second home.

Consider your original lender: When you buy your second home, it is better to apply for a loan from the same institution that financed your original home loan. This can help you get a better, reduced interest rate i.e. you loan can be reduced by 0.5% to 1%.