Thinking of buying a second home , but worried about the down payment? Losing sleep over the additional loan, and trying to evaluate the soundness of the investment? Even a ‘small’ investment in real estate can often mean lakhs of rupees, and the added financial pressure from buying a second house can often be overwhelming.
We’ve got some great tips to get you through this. Buying your second home may be easier than you think!
1. Decide what kind of second home you want to buy…
Do you want your new property to be an investment or a home away from home? The location of this second house will also affect the price tag, so choose wisely! A holiday home would be great if it is a quiet farmhouse on the outskirts of your city, a cosy nook in a calm place like Pondicherry, or an eco-friendly wood house in a hill-station; while an apartment that you can rent year-round in a city location with convenient facilities close by would be a better investment from the rent/income perspective.
2. Budget, Budget, Budget! - How to save for your dream vacation/holiday home!
Now that you’ve decided on what you want, begin the penny pinching. Monthly budgeting is the best way to begin. Start with a simple excel sheet to track all your expenses – rent, food, transport, treats and so on. Assign an overall percentage to each of these items to see where you are spending more or less, what is required and what isn’t. Target the top 3-4 most expensive items on your list and focus on how you can save here.. It can be easy to lose track of your spending, so rather than waiting until the end of the month, start right at the beginning.
3. Minimize on the Luxuries
This is an important step that will probably take you further on your path to a second home loan than you might think. All those little luxuries add up, and if you were to control them, you’d realize how much quicker you could hit your savings goal. Find a balance between cutting them out completely and overspending – make a fancy meal at home rather than eating out at an expensive restaurant every week. Instead of burning money on fuel, carpool with colleagues. Make a list of your monthly expenditure and look for expenses that can be minimized.
4. Treat Yourself
Keeping the purse strings too tightly closed can backfire – you snap and make expensive, impulsive purchases. Rather than driving yourself crazy by denying yourself your every luxury, make a plan to treat yourself every few months. Set yourself a savings goal every quarter, and once this is met, treat yourself to a day at the spa or that nice mini-vacation you’ve always wanted. This reward program will make those months of saving for a holiday home easier as the months go by.
5. Consider Alternative Financing Methods
It is claimed that over 99% of all businesses receive their initial funding through family and friends, and the trend is catching up in the housing sector as well. If your family and friends are willing, this would be interest-free and would save you huge sums. This route needs careful thought – pick someone who is in a position to help you out so you don’t put them in a tight spot.
6. Get the Taxman to pay for your Second Home
Apart from borrowing, saving can be a form of alternative finance as well. A tax benefit on a second home loan is given on the interest part of the amount that you pay for a fully constructed house; or 20% of the total interest paid before construction began is also allowed as tax deduction while construction is not yet complete. Since the law considers your second home to be rented out and therefore eligible for income tax, these need to be factored in your budgets.
7. Increase your Down-Payment if Possible
Next, when you think you’re ready to make the big leap and buy that second property, it may be a good idea for you to pay a larger down payment on your second property than the standard. If you pay a larger sum upfront, say 30-35%, you will reduce the housing loan you’ll need to take out, thus saving yourself thousands of rupees in interest. This would allow you to finish paying off your loan faster and reduce the stress that comes with a large loan.
8. Things to Avoid Doing
While buying a second home could be a major investment down the line, remember not to take out a loan against your primary residence. This could spell disaster for you if some unforeseen financial reversal were to take place. You might end up losing both homes. Also, consider just how much this second home is going to cost you.
The Bottom Line
Saving for your new property doesn’t have to be about deprivation and anxiety, all it takes is some careful planning. A little forethought before you begin this journey will reduce all your tension and worry over loan repayments in the long run; and every time you check your house fund and see those numbers growing, it will motivate you to keep going!