Have the right strategy in case of co-borrowing

A co-borrower increases your home loan eligibility and reduces interest cost but banks do not prefer some categories due to legal issues

Want to increase your home loan eligibility? Having a co-borrower is the easiest way to do so. By pooling the incomes of two people, the loan eligibility can go up substantially. The best part: All the borrowers can enjoy tax benefits of Rs 1 lakh principal (under Section 80C) and Rs 1.5 lakh interest under Section 24 for a self-occupied property.

But you cannot get a home loan with just about any family member. Although there are no defined guidelines, there are some broad practices that most lenders follow. V K Sharma, managing director and CEO of LIC Housing Finance, says that joint home loans are given to those who are immediate blood relatives or spouse.

Siblings are not preferred, though there is no policy because there are fears of property dispute on the ownership. A joint home loan would be more difficult for two unmarried sisters because the question could arise as to who will take responsibility of the house after marriage and who to follow with for repayment. In such circumstances, the bank or housing finance company may agree if the borrowers can prove they have a joint source of income from, say, a family business or they stay as a joint family, says Vipul Patel, of Home Loan Advisors, an independent mortgage advisory firm.

Loans to one parent and child are not as common, especially if the parent is retiring soon and has a much higher income than the child. It is because if the amount is substantial and based primarily on the salary of the parent, banks prefer to give a shorter tenure loan. For example, if the loan amount is, say, Rs 1 crore for 15 years, whereas the parent’s income is Rs 2 lakh (take-home salary every month) and the child income is Rs 1 lakh (take-home salary every month), the bank might prefer giving the loan for 10-12 years, depending on the parent’s retirement. Interestingly, there can be more than two borrowers as well – a father, son and daughter-in-law trio could be allowed a home loan.

Co-borrowers need not necessarily be co-owners but it is advisable to have a co-owner, as it takes care of any succession issues that could come up in case of the demise of one of the owners, says Patel.

The tax benefit to all the co-owners mean that if there are two borrowers, the interest benefit will be Rs 3 lakh and principal benefit of another Rs 2 lakh for a self-occupied property. However, the exemption will depend on the amount each one is paying. For instance, if the EMI division is 50:50, the benefit will be divided to that extent.

The government has given an additional benefit this year. If the home loan is under Rs 25 lakh, the Union budget has allowed interest benefit of another Rs 1 lakh for properties bought till March 31, 2014.