A home of convenience

A joint home loan offers higher eligibility amount and more tax breaks

In the charming rom-com ‘Love per Square Foot’ on Netflix, protagonists Sanjay and Karina individually don’t earn enough to qualify for a home loan in maximum city Mumbai. So, they come up with what they think is a bright plan — a marriage of convenience — to be eligible for a joint loan. Not just in make-believe film scripts, joint home loans can come quite handy in real life too.

Benefits

One, a joint home loan can enhance the loan eligibility amount significantly since the lender takes into account the financial strength of the co-borrower too. Say, your annual income is ₹8 lakh. Based on this, the lender determines your home loan eligibility as ₹50 lakh. But what if you are seeking a loan of ₹75 lakh?

The lender may increase the amount, if you opt for a joint loan with other borrowers — say, with your spouse whose earnings are similar as yours. This could help you go for a bigger house or for a house in a costlier locality. Next, having a co-borrower who services the loan jointly with you can reduce the strain on your monthly finances.

Also, a joint home loan increases tax benefits on the whole. That’s because all the co-borrowers are eligible for tax breaks, if they contribute to the home loan repayment and are co-owners of the property. Each co-borrower can get deduction of up to ₹1.5 lakh on principal repayment under Section 80C, and deduction on interest paid (up to ₹2 lakh a year on self-occupied property, and interest to the extent loss from house property does not exceed ₹2 lakh a year on let-out property).

Co-borrowers, co-owners

When you go for a joint home loan, understand the difference between a co-borrower and co-owner, because this has implications on the tax breaks. A co-borrower is a person with whom you borrow the loan. A co-owner is a person with whom you own the house. Lenders mostly insist on co-owners being co-borrowers. Say, A & B, husband and wife, co-own a house. The home loan lender will ask for both A & B to be co-borrowers. Say A’s brother C offers to be a co-borrower to help A get a bigger loan amount. If C’s finances are ok, the lender is likely to allow this, though C is not a co-owner.

To sum, all co-owners are co-borrowers, but all co-borrowers need not be co-owners. There can be up to six co-borrowers in a home loan. Now, if you are thinking of getting your friend to join you as a co-borrower, the plan may not take off. That’s because lenders do not let all and sundry become co-borrowers. It is usually only immediate family members who are allowed as co-borrowers. NRIs can become co-borrowers, while minors cannot. The liability of co-borrowers to repay the home loan is joint and also single. That is, all the co-borrowers together and every co-borrower himself or herself has a liability to repay the loan. Say A & B, husband and wife, are co-borrowers and A passes way or otherwise defaults on the loan. In this case, B has to continue servicing the entire loan. Also, say, A’s brother C is a co-borrower but not a co-owner. If A defaults, C will continue to be liable to repay the loan though he is not a co-owner. So, be careful before adding your name as a co-borrower, especially when you are not a co-owner.

Tax benefit distribution

Tax benefits on home loans are available only to co-borrowers who are co-owners and contribute to the loan repayment. The distribution of the tax benefits happens in proportion to the share in the loan repayment. Say, in a year, co-owners A and B repay, in a 60:40 ratio, ₹3 lakh as principal and ₹5 lakh as interest on a home loan for a self-occupied house.

The tax break on the principal repayment works out to ₹1.8 lakh for A and ₹1.2 lakh for B, but A’s benefit is restricted to ₹1.5 lakh, the maximum allowed under Section 80C. On the interest repayment, the tax break is distributed as ₹3 lakh for A and ₹2 lakh for B, but A’s benefit is restricted to ₹2 lakh, the maximum allowed.

A co-borrower will not be eligible for the tax break if he or she is not a co-owner. If, for example, C is a co-borrower with A, contributes to the loan repayment, but is not a co-owner, then C will not be eligible for the tax break and A will get the break in proportion to his contribution to the loan repayment.

Also, for the tax break, what matters is the share of the co-owner in the repayment, not the share of the co-owner in the property.

For instance, a husband and wife may be equal owners in a property, but the wife is repaying the loan entirely. In this case, the wife can claim the entire tax break with a declaration that the husband is not claiming any tax benefit.

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