Real estate figures prominently on most people’s list of investments, whether for their own personal use or for letting out. Home loans make it easier to arrange for the necessary funds when purchasing a house. Most home buyers are aware of the home loan process and its associated tax benefits. Interestingly, borrowers can also avail of a second home loan if they wish to buy another property, and even enjoy tax deductions on it.
What to Expect from a Second Home Loan?
If you want to rent out your other property, availing a second home loan will fetch you tax benefits on its rental income and the interest paid towards the loan. Here are the considerations one ought to make under the following circumstances –
If You are Still Servicing the First Home Loan
When a borrower is still repaying the first home loan, s/he will find the application process for the second home loan to be like the previous one. Many individuals prefer approaching their existing lender for the second loan. If they have been regular in their loan payments, they can negotiate for a better interest rate with favourable terms. They can secure home loans on a pre-approved basis. As long as the debt to income ratio does not cross 50, they should be able to obtain a second home loan easily.
If You Have Already Repaid Your First Home Loan
In such instances, one should compare home loan offers for the best rate of interest and added benefits. Check the eligibility criteria and use a housing loan EMI calculator to make sure your choice of home loan suits your pocket and your priorities. You will have to submit the loan application form online or offline, and attach the supporting documents as mentioned by the lender. Furthermore, if you share a good relationship with your previous home loan provider, try to capitalise on it and secure competitive interest rates on your loan.
Taxation on the Second Home Loan
Those who wish to avail of a second home loan to finance a house purchase should know how taxes affects their property. Taxation for the different types of housing assets are given below:
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Self-Occupied Properties
The annual value of such properties is considered to be nil, on account of them being residential self-occupied houses.
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Let-out Properties
The income generated through rent from these houses is subject to taxation. This means that your rental income will be taxed under ‘Income from house property’. Even if you do not let out that particular property, a notional rent value will be taken as gross taxable rent. Sometimes, individuals may decide to lease out both their properties, and take up residence in a different home. In such a scenario, the total income collected as rent from both houses will fall under the ambit of taxes.
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Under-Construction Properties
If the second home is an under-construction property, 20% of the overall interest payment during pre-construction will be considered for tax deduction. This will be applicable for the first five years only.
Tax Benefits Available on a Second Home Loan
Home loan borrowers can claim tax reductions under Section 80C of the Income Tax Act, for both self-occupied and let-out properties. One can enjoy rebates up to Rs. 1.5 lakh on principal repayment towards the second home loan. These tax benefits also apply to investments such as Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), etc.
There are some additional tax deductions on a second home loan which include:
DLOP – If you are the owner of two self-occupied properties, one of the houses will be regarded as a Deemed Let-out Property (DLOP). The rental income acquired from it will be taxable, but you can still enjoy tax rebates up to 30% towards its maintenance and upkeep.
Section 24 – Under Section 24, one can avail income tax benefits up to INR 2 lakh on the interest payment of the second loan. As per the clauses of Section 24, the second home will not be treated as let-out if it is vacant. Also, deductions on the interest amount claimed for both properties should never exceed INR 2 lakh.
Points to Consider Before Availing a Second Housing Loan
Securing a suitable loan deal with attractive terms and interest rates makes it much easier to finance a second home. But there are certain aspects that must be kept in mind before obtaining the loan:
- Assess the property location and its market value
- Check the potential return on investment from it
- Ensure that the property purchase does not hamper your financial planning
- Find out about the tax benefits available on the second home loan
Potential borrowers should check the eligibility factors for their second loan. It is possible that financiers may not repose much faith in your loan-handling abilities when you seek a second home loan. They could apply stricter eligibility criteria and offer stringent terms to make sure that you can honour the loan within the agreed tenor.
Moreover, the upfront money may be steep when compared to the previous loan, while the sanctioned loan principal could be lower than the expected sum. A second home is usually an investment, which is why, lenders may offer the second loan at higher interest rates with shorter tenors to cushion the credit risks.
Summing Up
Your eligibility for securing a second home loan is an important factor that lenders will closely evaluate before approving the loan. Hence, assess your own income pool and see if you can handle the loan efficiently. Availability of tax benefits on a second loan makes home purchase more cost-effective. However, one must be aware of the related conditions to derive maximum advantage from them.
