When multiple borrowers apply for a loan together, it is called co-borrowing. Co-borrowing can be done in many situations and for various purposes.
Borrowers coming together may raise their loan eligibility to a level they may not have been able to achieve otherwise as individual borrowers. Co-borrowing allows all borrowers the benefits of tax exemption subject to guidelines. But co-borrowing has some flipsides as well.
So let’s take a deep dive into the subject.
Eligibility For Co-borrowers
Typically, co-borrowing is allowed between blood relatives, spouse, and siblings. Married couples are allowed to apply as co-borrowers even if both applicants are not co-owners. However, if the co-borrowers are not spouses, then co-ownership of the property is mandatory.
Among blood relatives, sisters are exceptions and are not allowed to apply as co-borrowers. Friends and non-married couples are also not allowed to apply as co-borrowers. Also, if the co-borrowers are parent and child, the loan tenure usually allowed by banks will not overlap the post-retirement phase of the parent.
Additional Reading: Who is a co-applicant in a Home Loan?
How Does Co-borrowing Help?
With co-borrowing, the borrowers can raise their loan amount eligibility. Assuming your income allows you a loan eligibility of Rs. 70 lakh, but you are in need of Rs. 1 crore. In such a situation, you could become eligible for a bigger loan by bringing in a co-borrower.
In this arrangement, the lender works out the repayment abilities of all borrowers to arrive at the maximum loan eligibility available to them. This arrangement helps in not just improving the loan eligibility, but also the Credit Score of the borrower. Many lenders will not provide loans to applicants whose Credit Scores are below their required CIBIL score threshold.
For example, a lender’s requirement may be a CIBIL score of 700, while the borrower is at 650. So the borrower may bring in a co-borrower with a score of 750 in order to raise their collective eligibility to 700, in order to get the required loan.
Tax Benefits of Co-borrowing
While repaying a Home Loan, the borrower is allowed tax deductions under Section 24 for payment of interest up to Rs. 2,00,000 and under Section 80C for principal payment of up to Rs. 1,50,000.
When a loan is co-borrowed, the tax benefits are passed to the borrowers in the ratio they have borrowed the loan, assuming that the co-borrowers are also the co-owners of the property. The tax benefit ceilings apply to each borrower individually.
Let’s understand this with the help of this example.
Assume that a loan of Rs. 1 crore has been borrowed at an interest rate of 9.4% for 20 years. Here’s how the repayments of principal and interest, and the available tax benefits, work out in two cases: one, where the loan is taken by an individual, and two, where it is borrowed in a 50:50 ratio by a husband and wife.
| Individual borrower | Co-borrower share | Additional benefit to co-borrowers | ||
| Husband | Wife | |||
| Principal Paid per year | 1,80,000 | 90,000 | 90,000 | |
| Interest Paid per year | 9,30,000 | 465,000 | 465,000 | |
| Tax benefit under Section 80C for payment of principal | 1,50,000 | 90,000 | 90,000 | 30,000 |
| Tax benefit under Section 24 for payment of Interest | 2,00,000 | 2,00,000 | 2,00,000 | 2,00,000 |
| Total | 230,000 | |||
Note: Share of co-borrowers are assumed as 50:50. All amounts are in rupees. Calculation applies to the first year of the loan.
Bear In Mind The Flipsides
Co-borrowing can, no doubt, make it easy for you to claim a larger loan and also help you share the burden of repaying it. However, there are flipsides to co-borrowing and you should consider them very carefully before co-signing a loan agreement.
If you find yourself in a situation where the co-borrower isn’t able to repay his share of the loan, the lender can claim the whole amount from the other co-borrower. The co-borrower plays the role of a guarantor as well, and therefore one borrower defaulting on payments may lead to the other’s Credit Score getting dented.
Also, bear in the mind that a large number of unsettled legal disputes in India are property-related. Cases can drag on for years. In case you co-borrow and find yourself in a dispute with your loan partner, be aware that the legal system will take its own sweet time before arriving at a verdict.
Co-borrowing has its benefits, but it is also a massive responsibility, and therefore you need to carefully think things through before getting into an arrangement like this.
Additional Reading: Terms for adding co-applicants in a Home Loan!