Buying a home is often the biggest financial decision for many people. This purchase not just helps the home buyer fulfil his hopes and dreams by securing a roof over his head. It also ensures tax savings if he has taken a Home Loan to fund the purchase.
The tax savings can increase a notch if the Home Loan is taken jointly. Up to six individuals can take a Home Loan together, thus increasing their loan eligibility beyond what they can borrow individually. Also, by repaying the loan collectively, they can each derive tax benefits under Sections 80 C and 24 B.
Let’s take a look at the mechanics of taking a joint Home Loan.
Who Is A Co-Borrower?
Co-borrowing on a Home Loan can happen between 2-6 individuals, who need to be immediate relatives. Co-borrowers need not always be the co-owners of the property. This is decided by how the co-borrowers are related. However, to avail tax benefits on the loan, the co-borrower must be the co-owner of the property. (More on this in the next section.) So a co-borrower who is not a co-owner cannot avail tax benefits.
Who Can Be Co-Borrowers?
There are rules governing which relatives may be allowed to be co-borrowers. For example, married couples are ideally suited to a joint Home Loan, and they are at liberty to decide if they’d like to be co-owners along with being co-borrowers.
If the co-borrowers are parent and child (especially an unmarried daughter), the lender may insist on the child being the primary owner of the property. If the co-borrowers are siblings, lenders insist that they be co-owners.
Needless to say, friends or unmarried couples may not be able to take joint loans.
With a Home Loan, you’re allowed to claim tax deductions under Section 24 B for interest paid up to Rs. 2 lakhs in a year. You’re also allowed to claim Rs. 1.5 lakh under Section 80 C towards principal payments. This brings the total tax savings for an individual to Rs. 3.5 lakhs.
However, when the loan is jointly borrowed, it becomes possible to multiply these deductions. Let’s understand this with the help of the table below.
With an individual taking a loan for Rs. 50 lakhs for 20 years at 10% p.a., he’s able to save up to Rs. 2,82,737 in tax deductions. However, when the same loan is co-borrowed in a 50:50 ratio between a husband and wife, the tax benefits increase to Rs. 4,82,737 in the year. This allows the co-borrowers to save an additional Rs. 2 lakhs a year.
|Loan Taken*||Rs. 50,00,000||Rs. 50,00,000|
|Principal Paid||Rs. 82,737||Rs. 41,368.5||Rs. 41,368.5|
|Tax Savings Under 80C (1)||Rs. 82,737||Rs. 41,368.5||Rs. 41,368.5|
|Interest Paid||Rs. 4,96,276||Rs. 2,48,138||2,48,138|
|Tax Savings Under 24B (2)||Rs. 2,00,000||Rs. 2,00,000||Rs. 2,00,000|
|Total Savings (1+2)||Rs. 2,82,737||Rs. 2,41,368.5||Rs. 2,41,368.5|
(* For a loan of Rs. 50 lakhs for 20 years, borrowed at 10% per annum, divided 50:50 between co-borrowers. All calculations are for the first 12 months of repayment of the loan.)
Flipside of Co-Borrowing
Co-borrowing arrangements should be entered after carefully considering the repayment capacity of each co-borrower. It would be in their interest to avoid getting into property disputes, which may drag on for years.
When you apply for a joint Home Loan, the lending institution may check the financial records and credit history of each co-borrower. The borrowing record of each co-borrower needs to be above board and pass the eligibility criteria of the lender. Failing this, the loan may not be sanctioned.
Once the loan is sanctioned, it is the responsibility of all co-borrowers to repay their share of the loan. Any default by one co-borrower will impact the credit scores of all co-borrowers. Also, the lender may recover the defaulter’s dues from other co-borrowers.
Taking a joint loan can help you buy the property of your dreams. However, a Home Loan is a long-term commitment for all co-borrowers. Therefore it should be taken after a thorough assessment of each co-borrower’s repayment capacity.
Additional Reading: Buying A House? Wait Till May 1st
(The writer is CEO, BankBazaar.com)