How you can afford a second home

Here's a step-by-step guide to reach your dream

Buying a house has always been an emotional issue for most Indians. A house not only offers security to the buyer but it also helps him save on tax if he uses a home loan to fund the purchase.

The same logic holds true for a second house as well.

An investment in real estate can also help you to beat inflation. A second property would not only offer capital appreciation in the long term but also regular rental returns.

Though property prices in many pockets in India have peaked, it is still possible to achieve the dream of owning a second home with a simple plan. Take a step-by-step approach to reach your destination -- second home.

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The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

It starts with you zeroing down on the area and the property you wish to buy. This is only possible once you have finalised your budget. And your budget is dependent on your loan eligibility, given the high real estate prices in India.

There are many websites which give you a fair idea of the total loan a bank would furnish based on your net household income. Some banks too offer such calculators to their customers.

These banks also allow you to club your spouse's income for the computation of total household income. You should fix your second home budget based on your loan eligibility.

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There is another benefit associated with buying a house with borrowed money from banks.

For most individuals it would help in saving a sizable chunk of your income in taxes.

Also banks conduct a thorough due diligence of the property to check the title and the documentation to safeguard their capital. Only once they are assured of the soundness of the proposal they would furnish you the loan.

This assures you of the legality of the transaction.

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Banks provide only around 80 per cent of the value of the property; the remaining 20 per cent needs to be taken care by the buyer.

In addition to the price of the house, you have to pay the stamp duty, registration and other miscellaneous expenses associated with the purchase.

Banks do club such expenses with the price and fund it. But be ready with at least the margin money when planning to buy the house.

You can also club the salary income of your spouse with your income while borrowing from bank.

But a word of caution: banks insist on CIBIL credit score of the borrower. A score above 750 ensures that you get home loan.

All joint borrowers need to have high credit score.

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Though a home loan increases your access to better-bigger-costlier properties, take care your total monthly outgoings are not more than 35 or 40 per cent of your net income.

Also once you have purchased your house, there are various charges that you would have to factor in like the monthly maintenance charges, the property tax and other expenses associated with the house.

While a property in metro would offer faster appreciation in terms of capital value and rental income, it also comes with a huge price tag.

A comparatively bigger property in a tier II or III city would probably fit in your budget but rental yields and appreciation would be limited.

So if faster appreciation or a better rental income is your motive, a smaller house in a metro is always a preferred option.

The demand in most real estate markets are sluggish these days, so there is also a good chance of the developer giving in a good discount to close the deal. If you are looking at an under construction property, stick to reputed names, as there is always an execution risk.