Taking home loan for the second time? Ask yourself these 3 questions before going to the bank, if you ignore the third one your entire budget will be ruined.

Due to the increasing need of a house, a separate house for parents or to earn rental income from real estate, many people decide to take a home loan for the second time in their life. If you already have an active home loan or have recently repaid your first loan, banks generally do not hesitate in offering a second loan provided your credit score is above 750. But there is a world of difference in the financial mathematics of taking a home loan for the first time and taking a home loan for the second time. Getting bank approval does not mean that your pocket is ready to bear the burden of double EMI. Before signing a new agreement, it is very important to ask yourself these 3 basic questions and understand the accurate calculations.

Banks strictly check the ‘Fixed Obligation to Income Ratio’ (FOIR) of any customer before giving another loan. Most banks mandate that your total monthly EMI (first loan + second loan + car loan/personal loan) should not exceed 50% to 55% of your net monthly income (Net Take-Home Salary).

Suppose your monthly in-hand salary is ₹1,50,000 and your first home loan EMI is going to be ₹35,000 per month. As per the safe FOIR rule of 50%, the total of all your EMIs should not exceed ₹75,000. This means that you have a maximum EMI capacity of only ₹ 40,000 per month left for the new loan. If you invest 60-70% of your income only in installments, then your children’s education, medical emergency, family living and retirement savings will come to a complete halt.

If you are buying a second home only for the purpose of investment or rental yield, then you need to understand the ground reality of the Indian real estate market. The average rental yield for residential properties in India’s major metro cities (Mumbai, Delhi-NCR, Bengaluru, Hyderabad, Pune) hovers just between 2.5% to 3.5% per annum.

On the other hand, banks will give you a second home loan at an annual interest rate of 8.50% to 9.00%. This simply means that the money received from rent will be able to cover only one-third of the bank’s EMI. You will have to bear the remaining 65% to 70% financial burden of installments, property tax, maintenance charges and the months when the house remains vacant from your own pocket. Unless there is a solid possibility of capital appreciation of more than 10-12% per annum in property prices in that area, investing on heavy debt can be a losing proposition.

This is the bitter truth which most home buyers completely ignore. Many people have the misconception that if they have two home loans, they will get separate double tax exemption on the principal and interest of both the houses. The limits of tax rules under the Income Tax Act are very clear:

• Principal Repayment – Section 80C: Whether you are repaying one home loan or two, the maximum limit for total deduction under Section 80C is ₹ 1,50,000 per year. Your PPF, EPF, ELSS and children’s tuition fees are also included in this Rs 1.5 lakh.

• Interest Deduction – Section 24b: Even if you own two houses and declare both of them ‘self-occupied’, the maximum tax exemption limit on the interest on both the houses combined will be only ₹2,00,000 per year.

• Let-Out Property: If you rent out another house, the entire interest thereon can be set-off against rental income. But the maximum limit for deducting the total loss from House Property from other income (salary) under House Property head has also been limited to ₹ 2,00,000 annually. The remaining loss is carried forward for the next 8 years, but tax relief is limited in the current financial year.

If you take a second home loan of ₹50 lakh for a tenure of 20 years at the current average interest rate of 8.50%, the exact financial details of the monthly EMI and total payment will be as follows:

As is clear from the calculations, on a loan of ₹50 lakh, you will pay more than ₹54.13 lakh in interest alone to the bank in 20 years. This means that more money than the original price of the house will go towards financing costs only.

1. Keep adequate emergency fund: Two home loans means double responsibility. To deal with job loss or business downturn, set aside at least 9 to 12 months’ worth of both EMIs and household expenses in liquid funds (FD or liquid mutual funds).

2. Increase term insurance cover: As soon as you take a new loan, immediately increase your existing term insurance cover to the amount of the new loan so that in case of any untoward incident, the family does not get burdened with debt.

3. Create a pre-payment strategy: Plan to pre-pay 5% to 10% of the loan principal from the bonuses or incentives received every year so that the loan can be completed in 10 to 12 years instead of 20 years.

4. Consider Joint Home Loan: If your spouse is working, then make him a co-applicant and take the loan. This will increase your eligibility and both partners will be able to avail different tax exemptions.