Buying a home is a milestone goal in most people's lives and the earlier they achieve this goal, the more peaceful they feel. In current conditions building or buying a home without a loan is a difficult task especially if you are in your mid-twenties and early thirties.
True earlier generations waited for nearly a lifetime to save money for this goal, but this is not the case with the current generation, and with rising real estate prices this does not seem a sensible option as well. Nowadays, everyone wants to achieve goals early so that they can enjoy the fruits of their labour, when they are brimming with youth.
The younger you are when you take the loan the better it is, as you will be able to pay it off in the next 20-odd years, and will be able to own a home before you are well into your retirement.
If taking a loan early is an advantage, taking a joint home loan is a double advantage. Why? Listed below are the reasons.
a. The most significant advantage of a joint home loan is the increase in your loan eligibility. Incomes of the individuals taking a joint home loan are combined to determine the eligibility and it results in a higher loan amount.
b. Tax rebates are yet another advantage - as each of the individuals taking a joint home loan is eligible for individual tax benefits under Section 80 C currently for principal repaid and under Section 24 for interest repaid. However, these tax deductions are capped at 1 L for the principal repaid and 1.5 L for the interest repaid for each individual.
c. The number of people who can avail a joint home loan can be anywhere between four and six, depending on their individual credit profiles.
d. There is however one condition when banks lend money to joint home loan applicants, which is, all co-owners of the property should also be co-applicants, but the reverse need not be true.
Joint home loans are very much possible, but they do have their restrictions in terms of whom you can pair with for availing the loan.
Here are a list of possible combinations, and those who are not eligible for it:
- A married couple or a parent and child can take a joint loan.
- Some banks allow brothers to take a joint home loan provided they will both be co-owners of the property. Some exceptions to this rule are sisters, friends or unmarried couples living together who generally are not allowed such loans by banks.
Especially in the case of a double income household where both spouses are working this option is an excellent choice. It provides you with a chance to evaluate your budget needs, future job prospects, savings for different needs, negotiating a hike in pay and striving to better your credit score to obtain a good interest rate.
If you and your spouse earn similar incomes, then its best to opt for an equal co-ownership of the property, and split the tax benefits of the home loan equally as well.
In case one of you fall under a smaller tax bracket, it is good to let the partner with the higher pay make a higher contribution towards the home loan resulting in a better tax benefit collectively. This would help you optimiae the benefits from the tax exemption on principal and interest repaid.
For instance, let's say the principal and interest repayment on your home loan for a given year is Rs 2.4 lakh and Rs 3.5 lakh respectively. Now, under Section 80C, you can get a maximum tax deduction of Rs 1 lakh on principal repaid and under Section 24 you can get a tax break of up to Rs 1.5 lakh on interest repaid.
However, if you and your spouse have opted for a joint home loan, you would collectively be able to claim a deduction of Rs 2 lakh and Rs 3 lakh on the principal and interest repaid.
Do note that the tax benefits are according to the proportion of the loan. That is, if the ratio of the loan is 70:30, then a loan of say, Rs 50 lakh will be split as Rs 35 lakh and Rs 15 lakh respectively and this ratio will be applicable while calculating tax benefits on the interest and principal repaid on this loan.
Also keep in mind, that tax slabs might change according to new budget specifications each year and there could be changes in the gross income as well, not to mention changes in the total principal and interest repaid in every new year of the home loan.
In this regard, the interest repaid will become considerably lesser and the principal repaid will become higher during the latter years of the loan. For tax purposes, draw up a home loan sharing agreement, detailing the ownership proportion in a stamp paper to avail tax benefits.
So taking a joint home loan has the significant twin benefit of increasing your loan eligibility and maximising your tax rebate not to mention busting some stress due to sharing the debt burden.
The author is Head, Content&Research at BankBazaar.com, an online marketplace for personal loans, home loans and car loans.