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Money for a second home

Arti Sharma in Mumbai | September 02, 2003

After several years of marriage and two children, perhaps a one-bedroom house has become too cramped for your needs.

If you are seriously contemplating looking at buying a second bigger house, but have still not managed to pay off the older loan, Union Bank of India has introduced a scheme that will allow it.

You can now dream of a second, better accommodation for your growing family even while a current loan is being paid off.

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The scheme has been formulated keeping in mind changing lifestyles and aspirations of people already possessing houses but wanting to shift to better accommodation.

Under the scheme, any Indian citizen above the age of 21 can apply for the loan provided he or she has a regular source of income.

The scheme allows you, the prospective borrower, to apply for the home loan even before formal selection of the second house to be purchased takes place.

The eligible loan amount would be sanctioned on the basis of the repayment capacity and expected sale proceeds of the existing house.

Both of these factors will also be used to determine the budget and plan for buying the second house.

The way the loan works is that say you have an existing one-bedroom house and still have about Rs 80,000 odd to pay back on the old loan, the bank will treat that as loan 1.

Instead of asking you to first pay off that loan, the amount under loan 1 will be added to the fresh loan you take for the new house.

So say for the two bedroom house you now want to buy you need a loan of Rs 10,00,000, the bank will add the balance Rs 80,000 to the Rs 10,00,000 and give you a total loan of Rs 10,80,000.

For the new loan, the equated monthly installments will be re-worked at current rates keeping in mind your monthly income.

Currently, UBI charges floating interest rate of 8.75 per cent on a 5-10 year loan while it charges a fixed interest rate of nine per cent for a loan to be repaid in the same time frame.

Also, the bank gives you a period of 12 months to either sell the old house or pay off the remaining balance of loan 1, if you would like to retain the old house as well.

And in the case that you do sell the existing house and deposit it in the loan account, the proceeds will be treated as margin. Which means, there will be no prepayment penalty. It doesn't matter if your existing house is under mortgage to banks, financial institutions.

And the quantum of the loan, like other loans will be decided on the basis of you repayment capacity as well as the cost of the house.

As a rule, UBI gives 90 per cent of the cost of the house which not only includes the house but also the stamp duty, registration fees, transfer fees if any.

The maximum loan amount limit for the second home loan is the same as for any home loan - Rs 50 lakh (Rs 5 million) or four times the gross annual income whichever is less.

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