How to invest wisely in real estate

Mumbai-based Seema Nair is in a fix. She has zeroed down on a second property in Cochin and needs a second housing loan to fund it.

"I am already servicing one home loan, which eats around 50 per cent of my salary. I don't know if my bank will approve of a second loan," Nair says.

Nair's current housing loan is worth Rs 40 lakh (equated monthly instalments, or EMIs = Rs 38,500) for 20 years. She needs another loan of at least Rs 25 lakh (EMIs = roughly Rs 25,000).

Another loan for the second home would mean increasing her EMIs by another Rs 20,000 (20-year loan), which is affordable on a monthly take-home salary of Rs 80,000. But banks would be wary because the EMI-to-income ratio would exceed 60 per cent.

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Typically, if your net monthly income is less than Rs 1 lakh, your net outflow towards servicing all debt should be 55-60 per cent. And, if it is over Rs 1 lakh, your outflow towards debt is allowed up to 65-70 per cent.

This is what worked in favour of Pune-based Vinod Kumar's employed wife. "Our second property was in an area fetching a good rental," says Kumar.

He has properties in Pune (loan = Rs 18 lakh, three years before) and in Bangalore (loan = Rs 35 lakh, two years before).

"Banks assume that borrowers will get a 10 per cent annual salary raise, which will help them bear the cost of loan," S Govindan, general manager personal banking & operations, Union Bank of India, says.

For Nair, an EMI-to-income ratio of 75 per cent is very high. But she has some interesting options.

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If you are seeking loan from the same bank, the interest rate can be negotiated. For customers with a good track record, the benefit could be as high as 50-100 basis points.

Another option, according to Kamlesh Rao, head home & personal loan division, Kotak Mahindra Bank, to give the second loan on a higher loan tenure.

For instance, you have a monthly income of Rs 1 lakh. You have Rs 40 lakh loan (EMI = Rs 38,500) for 20 years and you want another loan of Rs 30 lakh (EMI = roughly Rs 30,000) for 20 years.

Since, most banks are unlikely to approve the amount, you could be sanctioned the desired loan on a higher tenure of may be 22 or 25 years. This would result in a lower instalment, which would not strain you monthly outgo.

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A smart option could be a combination of top-up plus loan-against property. By simply taking loan-against-the first property, Nair can raise Rs 22 lakh.

And, she will need to raise Rs 3 lakh. But it would be an expensive option. HDFC, for instance, charges 12.25 per cent on loan-against-property.

In case Nair uses the top-up option, she can raise as much as Rs 10 lakh through the route. The interest rate would be 10.75 per cent (HDFC). The remaining Rs 12 lakh can be obtained through the loan-against-property route.

Finally, you could also consider pledging your investments to increase your home loan eligibility.

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Your life insurance policy, investments in shares of companies, long-term investment, such as National Saving Certificate (NSC), Indira Vikas Patra, Kisan Vikas Patra and mutual funds, can be kept as security. Investments increase in value and make it easier for banks to recover the loan.

If you can afford, you get the benefit of having a second loan.

While you get tax benefits of up to Rs 1.5 lakh on interest repayments on a first home loan, there is no limit on a second home loan. So, the entire interest payout is tax-free.

The principal repayment, though, stays a part of the Rs 1 lakh limit under Section 80C of the Income Tax Act.

But if you are purchasing a second home, it is important to identify areas where you can earn a good rental. It will ensure the loan burden is reduced substantially.