Real estate is high on most people’s list of investments, whether for personal use or for rental. Home loans make it easier to obtain the necessary funds when buying a house. Most home buyers are familiar with the home loan process and the tax benefits associated with it. Interestingly, borrowers can also benefit from a second home loan if they want to buy another property, and even benefit from tax deductions on it.
What to expect from a secondary home loan?
If you want to rent your other property, benefit from a secondary mortgage will earn you tax benefits on its rental income and the interest paid on the loan. Here are the considerations that one should make in the following circumstances –
If you are still managing the first home loan
When a borrower is still repaying the first home loan, they will find the application process for the second home loan to be similar to the previous one. Many people prefer to go to their current lender for the second loan. If they have been regular in their loan repayments, they can negotiate a better interest rate with favorable terms. They can get home loans on a pre-approved basis. As long as the debt ratio does not exceed 50, they should be able to easily obtain a loan for a secondary residence.
If you have already repaid your first mortgage
In such cases, one should compare home loan offers for the best interest rate and additional benefits. Check the eligibility criteria and use a home loan EMI calculator to make sure your home loan choice fits your pocket and your priorities. You will need to submit the loan application form online or offline, and attach supporting documents as mentioned by the lender. Also, if you share a good relationship with your previous home loan provider, try to take advantage of that and get competitive interest rates on your loan.
Taxation of the Secondary Residence Loan
Those who want to take advantage of a secondary home loan to finance the purchase of a home should know how taxes affect their property. The taxation of the different types of real estate is presented below:
The annual value of these properties is considered nil, since they are independent dwelling houses.
The income generated by the rents of these houses is subject to tax. This means that your rental income will be taxed under the heading “Property income”. Even if you do not rent this particular property, a notional rental value will be considered gross taxable rent. Sometimes individuals may decide to rent out their two properties and move into another house. In such a scenario, the total income received in the form of rent from the two houses will fall under tax.
Properties under construction
If the secondary residence is a property under construction, 20% of the overall interest payment during pre-construction will be taken into account for the tax deduction. This will only apply for the first five years.
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-catering and rental properties. One can avail rebates of up to Rs. 1.5 lakh on principal repayment for second home loan. These tax advantages also apply to investments such as Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), etc.
There are additional tax deductions on a second home loan, including:
DLOP – If you own two independent properties, one of the houses will be considered a Deemed Leased Property (DLOP). The rental income derived from it will be taxable, but you can still benefit from tax deductions of up to 30% for its upkeep and upkeep.
Section 24 – Under Section 24, one can avail tax benefits of up to INR 2 lakh on the interest payment of the second loan. In accordance with the clauses of article 24, the secondary residence will not be considered as rented if it is vacant. Moreover, deductions on the amount of interest claimed for both properties should never exceed INR 2 lakh.
Things to consider before availing a second home loan
Obtaining a suitable loan with attractive conditions and interest rates greatly facilitates the financing of a second home. But there are some aspects to keep in mind before getting the loan:
- Assess the location of the property and its market value
- Check the potential ROI of it
- Make sure buying the property doesn’t get in the way of your financial planning
- Discover the tax advantages available on the second home loan
Prospective borrowers should check the eligibility factors for their second loan. Financiers may not place much trust in your loan management abilities when applying for a secondary home loan. They could apply stricter eligibility criteria and offer strict conditions to ensure that you can honor the loan within the agreed time frame.
In addition, the initial money may be high compared to the previous loan, while the principal of the sanctioned loan could be lower than expected. A second home is usually an investment, so lenders may offer the second loan at higher interest rates with shorter terms to cushion credit risk.
Your eligibility for a second home loan is an important factor that lenders will carefully consider before approving the loan. Therefore, assess your own income pool and see if you can manage the loan effectively. The availability of tax advantages on a second loan makes buying a home more profitable. However, one must be aware of the conditions attached to it to get the maximum benefit from it.