Second home loans: Is it worth paying two EMIs for the rest of your life, just to save income tax?

People who get a home loan for the first time have a different mindset, but there are some who are open to exploring the benefits of loans and are willing to take another one.

Pratiksha ThayilUpdated: Thursday, December 01, 2022, 01:59 PM IST
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Second home loans: Is it worth paying two EMI’s the rest of your life, just to save on income tax? | FPJ

Becoming a homeowner is a matter of pride, especially in metro cities where property rates are very high. Taking a home becomes a necessity for some, while others plan their future and invest accordingly. Today, while many believe that having a house or property in their name is not important, there are some who are taking a second home loan to buy another house.

Before we go into discussing what is a loan for a second home, let’s first understand the benefits of a home loan.

Home loan benefits

A loan that is taken for buying, constructing, or repairing a house will help you claim exemption from interest under Section 24B. For one residential property you can get an interest benefit of up to 2 lakhs every year. You will have to submit the amount you paid as EMI including the interest every month, but you can get relaxation on the interest.

The deduction in tax is applicable for both commercial and residential properties. You can take this rebate even when you take the loan from friends or relatives.

You can also claim a deduction on the principal amount up to Rs. 1.5 lakhs under Section 80C.

There are no prepayment penalties on floating rate home loans, unlike other loans where the lender charges prepayment penalties on any payments made towards the home loan. This means that whenever you have surplus money, you can utilise it to make partial payments.

Most importantly, you have the facility to transfer home loans to a different lender if you are getting a better or lower interest rate.

Second home loans

People who get a home loan for the first-time have a different mindset, but there are some who are open to exploring the benefits of home loans and are willing to take another home loan. The reasons for a second home range from building assets, price appreciation of property in future to tax benefits.

The first question that you probably have in mind is can you get two loans at the same time? The answer to this question is yes. But this will depend directly on your income and the probability of you paying off your debt.

If you are well off and are earning an income that allows you to pay for multiple EMIs without directly impacting your savings or daily expenses, then you have multiple options to opt for two home loans at the same time. You can take credit from banks or some other finance company, or you also have the choice of getting your loan refinanced.

The second loan facility is applicable to properties in the same city and a different city. Though, if you want to purchase agricultural land to build a house then this loan is not applicable. It operates in the same way as the first loan, the only difference is that your repayment caliber will be very critically analysed. Banks are very strict when they are giving out a second home loan to the same person.

Benefits of second home loan

Like any other home loan you can claim exemption of interest, but it will only be applicable for one of the properties. Earlier, the tax benefits were limited to one home, but now you can claim tax benefits on two home loans.

You can claim deduction on the principal amount under Section 80C for multiple properties regardless of whether they are self-occupied or rented out. Tax benefits on second home loans under construction will be available for five years. 20% of the interest which must be paid during the pre-construction phase will be eligible for deduction.

Additionally, if you have rented one house, then a sum close to 30% of the home's yearly appreciated worth is allowed for deduction so that it can be set aside for remodelling, other repairs, and routine maintenance. If you have taken a joint loan, then the taxation will be divided based on the ownership percentage.

If you have multiple properties, then only two can be claimed as self-occupied, this means the other property will be seen as 'deemed to be let out' which implies that the other property is on rent and the rent collected will be taxable. This was after the government changed the policy stating that the second house could also be declared as self-occupied.

It is important to understand that these benefits are only applicable if you have two home loans together. If you have already paid off the first loan, then the second one will be treated as a single loan only.

Is a second home loan advisable?

The first thing that most people consider when getting a home loan is being a proud homeowner. But it is important to remember that this is a long term obligation in terms of repayment. Add on to those two home loans, and the amount and the time may not be acceptable to all. If you have the finances to make the payments, then it is a good investment, but otherwise, a second home loan may not be ideal. Even if you set aside rent to pay out the EMIs, it can still have an impact on your finances.

Secondly, if you fail to pay the home loan, then the bank or financial institution will use all sorts of legal recourse, which in worst case scenarios includes eviction from the house.

During the initial stages, the interest to be paid is high, which in turn helps with the tax payments. But later on, as the interest goes down the tax benefits also go down.

Maintenance cost of second homes can be high depending on the locality, building and the size. If you have a rent deal that allows you to pay your EMIs and at the same time the maintenance then you don't have to worry. But, if you have to pay extra, then your finances will again take a hit.

While having a second home sounds like a very tempting offer, it may not be a wise choice. Unless you have the financial capacity to manage two EMIs.

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