Did You Know Buying a Second Home Can Save You Tax?

There are plenty of reasons why you may want a second home, and the good news is that you no longer need to be super rich to afford one. If you are hesitant about the financing options, you don't have to be. Instead of being bogged down with the thought of additional EMI payments, you would actually benefit in terms of tax exemptions. Let's try to understand this a little better by examining different relevant scenarios.

If you have taken a loan on your first house, should you take out a loan on the second property as well?

Let me share some of my learnings with you. To begin with, say you are living in a house that you bought on loan. As we all are aware, in this case, the principal amount repaid up to 1 lakh will qualify for deduction under Section 80C of the Income Tax Act, 1961, while up to 1.5 lakhs of interest paid will be tax-deductible under Section 24(b). Now, if you decide to purchase a second property by taking out another loan, you will still be eligible for deductions not on the principal amount but on the interest payments. The good news here is that there is no cap of 1.5 lakhs, or any other amount. In other words, if you are paying an interest of about 5 lakhs, then this entire amount will be eligible for tax deduction, given the prescribed formula.

Not convinced yet? No problem, this second scenario is sure to convince you to loosen your purse strings.

Say you live in Mumbai, but decide to pick up a property in your hometown, Pune, for its sentimental value. Now, it's obvious you will not stay there. So, you decide to rent it out for a certain amount. This second property will be considered as the "let out" house. Let's assume after the municipal tax deductions, you earn 1.5 lakhs as rent from your second property, which would be considered as its annual value. Since a standard deduction of 30% is allowed on the let out property, the amount will work out to be INR 45000. Moreover, let's assume you are paying Rs.1.4 lakhs as interest on the home loans taken for second house. So, when you do the math, you will actually benefit by INR 35,000. Complicated? The below mentioned example will help you understand this concept better.

1. Rented Income: INR 1,50,000 per annum
2. Standard Deduction @ 30%: INR 45000
3. Interest paid on loan: INR 1,40,000
4. Income from the second house: INR 35,000.

In short, you will be able to claim tax benefits of INR 35000 when filing for returns!

There are a few more things that you need to keep in mind before you can fully realize the benefits of tax exemption on your second home.

1. What if the house is self-occupied?
   
   Income Tax 1967 states that if you possess more than one house, then on the one that you declare as self-occupied, its annual income will be considered as nil. Also, the second property's rent value will be considered for taxation purposes. Therefore, if you declare your second house as a rented property, then whatever you earn in terms of rental income will be subject to taxation.
2. What if you keep your second house vacant and don't rent it out?
   If you have not declared your second property as self-occupied and have not rented it out, then despite of not earning any rental income on it, it will be considered as "deemed let out property". In such a scenario, the notional rent, the income that you would have earned had you rented out the house, on the vacant property will be assessed and the same will be taxable. Moreover, second homes will allow you to claim a 30% deduction for all the maintenance and repair charges.
3. What if your second house is an under-construction property?
   If you decide to invest in an under construction residential property, then 20% of the total interest that is to be paid during the preconstruction phase will be allowed as tax deduction. However, this tax benefit on pre-construction house is available for a maximum of five years.
4. What will be the tax implication if you decide to rent out your second home as well as your first property?
   If you decide to rent out all your houses, then the rental income that you will receive from these properties will be subject to taxation. Also, a full deduction on the amount that is to be paid as interest on the corresponding home loans will be allowed, thus helping you save a significant amount.
   Thus, investing in a second home can prove to be a beneficial proposition both in terms of tax benefits and from an investment perspective, so it's something you should consider for sure!

[Source: https://www.tatacapital.com/blog/home-loan/buying-a-second-home-can-save-tax]

Common Reasons why your Loan is rejected

Has it ever occurred to you as to why your loan application was rejected even after regular repayment of your existing debts? It might be a cause of obtaining too many debts or no loans at all. Credit scores are a key element in gathering loans; however, too many loans may be portrayed as “hunger for credit”. On the other hand, no loans depict that you have no credit history. Hence, there is a fine line between too much credit and no credit history.

Delegates from credit rating bureaus state that non application of a loan for a few years in a stretch leads to insufficient information about an individual’s credit transaction activities in the rating agency’s database which means a negative score. Here are a few reasons why your loan application might be rejected:

The credit score provided by CIBIL is computed on the basis of the borrower’s credit history over the past 24 months. Generation of the CIBIL Transunion score requires the borrower’s recent credit history over a minimum period of six months. Hence, an individual who has repaid and closed his home loan and/or credit cards a few years ago and does not possess any existing loans or credit cards post repayment will not get a CIBIL score. His/her credit score will reflect a value of “-1” which indicates that no history (NH) is obtainable on the borrower for generation of the credit score.

Bankers take the NH rating of an individual seriously as a clean history means absence of any available data which leads to increased checks and balances. If an individual does not have a loan history or a credit score, the bank will try to gather more information which makes the loan approval process measured and time consuming. People with o credit history are asked to provide more references so that their backgrounds can be cross checked.

Agencies consider other characteristics while providing your credit rating; for instance, unexpected utilization of all your credit cards when you have been making use of only one credit card for a long time, various unsecured loans and excessive credit utilization. Too many unsecured loans are viewed as risky behavior which indicates that the individual has too many contingencies. Hence, your potential to repay the money on time is questioned.

If you are planning for a home loan or a car loan, it is advisable that you clear your debts well in advance preferably within six months to a year. If you have incurred too many personal loans, you can apply for one big loan that will help in settling all other dues. However, you need to ensure that the installments are being paid regularly and within the specified deadlines. Loan application in this case might be rejected if you are unable to make timely payments.

Clearances of dues like bouncing of an earlier cheque are essential. The amount to be repaid might be infinitesimal, but reflects poorly your loan-taking ability.

Loan applications by Young adults with little or no credit history might be rejected in which case it is advisable to have a parent with active credit movement to be a co-applicant to incur the loan.

[Source: https://www.creditsudhaar.com/blog/2015/10/24/common-reasons-why-your-loan-is-rejected/]

Charges on home loans that you may be unaware of

Buying your first property is perhaps the most important decisions you are called upon to take in life. And if you are opting for a home loan on it, it requires you to conduct a thorough research before you decide which the best home loan is for you. Most people tend to think that merely comparing home loan rates is enough to find out the best home loans in India.

But did you know that knowing all about home loan interest rates is far from adequate while checking out the right home loan for you? For starters as a prospective home loan borrower, you should be aware of the host of other charges that you are expected to pay while taking a home loan. Here are some of the charges you may not be aware of.

Processing and Administration fee

In most cases, it is 1-1.5% of the total amount of loan being sanctioned to you. Other lenders may not take a processing fee upfront, but may charge you an “administrative” fee once the loan has been sanctioned and disbursed. This amount tends to be higher than the processing fee. Not only should you check out the processing/ administrative fee of the lenders you have shortlisted while comparing home loan rates, you can also negotiate with the lender to waive off this fee. This will however depend upon the amount of loan you have applied for, you income bearing and your credit score. If you have made a conscious attempt to improve your CIBIL score and maintain a CIBIL score of 850 or above out of 900, you may even be able to insist upon a complete waiver.

Technical evaluation and legal fee

Some lenders may carry out two evaluations before arriving at the true valuation of the property you have chosen. The fee that is associated with this evaluation is absorbed from you as the borrower. Rarely, the lender may pick up the tab for the technical evaluation of the property. The other part of the evaluation is the scrutiny of your legal documents.

Franking fee on sale agreement and loan agreement

Real estate charges vary from state to state in India. Therefore, in some states you may be expected to pay a stamp duty on the property agreement you enter with the builder that is around 0.1% of the cost capped at ₹ 20,000. Additionally, in some states like Karnataka and Maharashtra you need to pay a franking fee of 0.1-0.2% of the total loan amount sanctioned to you.

Indemnity Cost

By charging you the borrower for indemnity, the developer safeguards his interests. By agreeing to indemnify the lender, you are in effect agreeing to bear the monetary risk of the loss or unavailability of an important document, the non- receipt of any important approval from a concerned authority. This is usually a few hundred rupees varying from state to state.

[Source:https://www.creditsudhaar.com/blog/2016/12/09/charges-on-home-loans-that-you-may-be-unaware-of/]

Basics of a Home Loan

Home Loan

Home Loan Best Option for our Basic Need

Home Loan

Home Loan without Documents

Secret of No Document Home Loans –

First of all, one has to understand what does “No Doc Home Loans” mean?

These can be defined as the no asset; no income and no employment verification offers from the financial institutions to borrowers to get their home financed or simply get a home loan.

But, the truth is that no lender can sanction any money without doing the verification. Yes, banks and NBFCs lend the money with few documents but there are other factors and complications involved in it.

One has to pay the high rate of interest for home loan with few documents. The lenders charge high rate of interest because less documents means more risk involvement.

Another noteworthy factor is lenders take some time to approve the home loans; say at least 3 days or more is required for the sanctioning of home loans. No institution approves home loan in 5 or 10 minutes. Sanction letter can be issued in few minutes. So, in this context, it is necessary to understand the meaning of home loan sanction letter. This is not something which implies the disbursal of loan. It means the applicant is eligible to a home loan from the lender. So, in simple words, this establishes the eligibility for home loan of the borrower only. Many lenders issue the sanction letter, on the basis of the information provided by the applicant but detailed verification from their sides are done at the later stage.

So, let’s dig deep enough to understand the truth behind “No document home loans”

No Document Home loans can be segregated into 3 major types and each one of that is unique in itself. So let’s explore these one by one

1. No Ratio Home Loans – Here, the home loan seekers do not have to disclose their income details to the banks and NBFCs. So, lenders can’t find out the debt to income ratio. Generally self-employed people apply for this type of home loan. And interestingly, this loan is available on a very limited basis.

‘No Document home loans’ can be classified on the –basis of income of the applicant also

3. Unorganized Sector Home Loan – Here the basic difference is that this type of home loan is suitable for those who have gone bankrupt or have bad credit score history. Keeping into consideration the requirements of varied low income group people, whose incomes are even not stable; lenders issue this type of home loan. Here, one can maintain maximum privacy and showcase very less information but has to bear higher rate of interest.

In case of ‘No Document Home Loans’, total home loan amount is calculated and sanctioned on the basis of -

Earnings of last 2 years of borrower (may be estimated or substantiated through any other record)

Bank statements or Income tax returns (ITR)

So, whenever our eyes glanced on alluring advertisements - we must remember nothing comes for free in any case. Lots of factors and complications are involved with any offer.

One has to carefully tap the right and suitable offer for him/her and, figure out what works best in the particular situation and then take the decision accordingly.

IIFL Home Loans cares for the needful. To fill out the demand and supply gap, it brings forth its unique product, “20 year affordable home loan scheme” that would touch the lives of millions and millions of people. Apply to open the door to owning your own home.

[Source: http://www.iiflhomeloans.com/iifl-blogs/Home-Loan-without-Document]

Top 5 Reasons to Refinance your Home Loan

1. To shorten the term of your loan

With interest rates at a record low, you may find that repayments on a 20 year mortgage are not much more expensive than a 30 year mortgage. If you’re able to meet the higher repayments, refinancing to a shorter loan term will make you pay your loan off quicker and save you money over the life of the loan.

2. To lower your interest rate

Refinancing your mortgage to a lower interest rate could mean drastically reducing your payment and saving thousands of dollars in interest. Lowering your mortgage payment can also save you hundreds of dollars per month that could be saved or invested.

3. To change from a variable rate to a fixed rate loan

If you currently have a variable rate mortgage, now may be the perfect time to refinance to a fixed rate loan. If interest rates rise again during the fixed period of the loan, you can save on interest repayments and a having a fixed payment is easier to plan and budget for.

4. To cash out home equity

Refinancing your home loan can be a great way to access home equity so that you can invest in a rental property or shares. This is called ‘gearing’. Alternatively, you can use your equity to renovate, for home improvements or any other worthwhile purpose.

5. To consolidate debt

Rather than paying off personal or car loans at a high rate, it might be worth consolidating your personal loans into your home loan so you can pay off your debt at the lower rate. This enables you to pay the debt off faster and potentially save thousands of dollars in interest payments providing you maintain you repayments at current levels.

[Source: http://www.beyondbank.com.au/blog/2013/12/top-5-reasons-to-refinance-your-home-loan/]