Take a joint loan to buy property
Besides increasing the eligibility, tax benefits will also double
In 2013, when Aditya Nitsure, 40, software engineer and Smita Barve, 37, a private sector employee bought a property on a joint home loan from LIC Housing Finance, their main reason was the rate of interest. Says Nisture: “There was an offer of a lower interest rate of 10 per cent on a joint loan of ~44 lakh. Currently, the rate is 9.5 per cent. It also increased our eligibility.”
While Nisture and Barve got a lower rate, one of the main reasons for going a joint home loan is eligibility. It allows the family to buy a bigger house, and many times even in a better locality. So, if you are a young couple looking to buy a home and both are earning members, clubbing both spouses’ income makes a lot of sense. “The cost of buying real estate is high, and home ownership may often elude some families on a single income. However, with your spouse as a co-borrower, it may be possible for you to leverage your combined incomes and individual credit scores to borrow more at a lower interest rate,” says Adhil Shetty, CEO, Bankbazaar.com. However, a home loan is a long commitment of repayment running over the years and needs financial disciple. There could be events midway that can impact the borrowers. The advantages include:
Larger loan amount: This is the most obvious benefit when you jointly file a loan application, the eligibility becomes bigger. Hence, the lender can sanction a bigger loan amount clubbing the incomes of both husband and wife. For instance, if you want to purchase a property of ~1 crore, and need a loan of ~80 lakh for 20 years. The equated monthly instalment at 8.5 per cent interest would be around ~70,000. Since the bank would usually allow 50 per cent of the take-home salary to be used as EMI, you need to earn around ~1.4 lakh a month (post-tax and other benefits). If your wife is an earning member, her salary will come in handy. You can buy a better and more spacious house by taking a higher loan, irrespective of the fact that you may have a lower income individually.
Faster loan repayment: When you avail of a joint loan, repayment can be faster. Given that there is no restriction on prepayment of the overall loan amount, a person can choose the best possible option to pay. Spouses can make pre-payments from their bonuses, the variable payments that they receive from their employers, as well as other sources of income, from time to time. This will enable them to try closing the loan account at the earliest, and also help reduce the interest burden.
Lower registration cost for women: Several banks offer lower interest rates to women applicants. Further, across some states, women get the facility to avail of the lower stamp duty fee for the purpose of registration of the house/flat. The stamp duty fee differs from state to state. “By having your wife as the primary applicant in a joint home loan, you can substantially save on the overall cost. You can enjoy a concessional interest rate for a home loan as well as the stamp duty fee for the property registration,” says Raj Khosla, founder and managing director of Mymoneymantra.com
Tax benefit: Getting higher tax concession while taking joint loans adds to a bigger advantage for couples taking loan altogether. A couple can avail combined tax benefit of ~7 lakh. That is, ~3 lakh (~1.5 lakh deduction each) under Section 80C and ~4 lakh (~2 lakh each) for interest payments under Section 24(b).
While the thought of owning your own home is exciting, there are things you should be careful about while taking the joint loan or during the tenure of the loan.
Impact of default on credit score: Both husband and wife share equal liabilities and obligations as co-borrowers of a joint home loan. Hence, in case of any reason, such as loss of a job, one of the spouse’s part in repayment does not come in leading to default, the credit records of both partners get impacted. “As co-applicants, a couple takes joint responsibility of repaying the loan in full. Failure to repay by one partner will impact the credit scores of both partners,” says Shetty.
Divorce or death: If partners decide to divorce during the pendency of the loan, it is important for both to understand that the loan still needs to be paid and figure out ways to pay up in full. “To recover its dues, the bank can repossess the property and, where necessary, also initiate necessary legal action against the borrowers. Therefore, coborrowing spouses would do well to arrive at a clear agreement beforehand on how they will manage their debts should they need to split in the future,” says Shetty. In the unfortunate event of the death of one of the partners, the surviving partner is responsible for the timely payment of instalments.
Follow these simple rules: It is important to make a will so as to avoid legal obligations if the owner dies during the loan repayment tenure. Also, while this may be difficult to imagine when the marriage is going well, one should consider signing a legal agreement about the share of the property, repayment of the loan, and other key factors. This will help the spouses in case they get divorced during the loan tenure.
It is also advisable while taking a loan that one should also buy an adequate loan protection cover. A term loan to cover large liabilities is a must for those who have dependants and are likely to leave behind liabilities in case of untimely demise. The insurance cover will ensure that the burden of home loan does not fall on one spouse in case of death. “Buying a home loan insurance to cover repayment obligations is strongly recommended. Furthermore, execute a legal agreement specifying liability distribution in case of disputes,” Khosla advises.
“There was an offer of a lower interest rate of 10 per cent on a joint loan of ~44 lakh. Currently, the rate is 9.5 per cent. It also increased our eligibility.”
ADITYA NITSURE
Software engineer