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Advantages and disadvantages of home loan in joint names

A home loan can be taken in your individual capacity – in your single name. Or it can be taken in joint names, usually along with your spouse.

There are pros and cons of doing this. Read on.

In “An introduction to home loans and factors to consider”, we saw the basic things you should look for while evaluating a home loan offer from a bank, and while comparing the home loans from different banks.
But apart from these basic factors that you need to consider for a home loan / mortgage, there is another aspect that is equally important, and bothers most of us – should the home loan be in a single name, or in joint names? What is better? What are the benefits, and drawbacks (if any)?

Let’s find out.

 

Advantage 1 – Increased Loan Amount

How do banks sanction the home loan amount? There are many factors, but an important factor is the Equated Monthly Installment (EMI) as a percentage of your monthly pay.

Banks ensure that the EMI as a proportion of your monthly income is not so high that it becomes a burden on you. Banks do this in their self-interest: A high EMI to monthly salary ratio means that the possibility of you defaulting on a home loan EMI would be high, thus increasing the risk for the bank.

So, as a rule of thumb, the higher your income, the higher would be the sanctioned loan amount.

But what if you need a higher loan? Your income is fixed – you can not increase it for taking the home loan!

The easiest way to fix this is to take the home loan in joint names. Usually, you would take the home loan along with your spouse.

In this case, the bank combines the incomes of both the applicants, and thus, can sanction a proportionately higher loan amount.

Example

Let’s say your income is Rs. 5 Lakhs per annum. On an individual basis, let’s say you are entitled for a home loan of Rs. 20 Lakhs for 20 years.

If you take the loan in joint names with your spouse, who also earns Rs. 5 Lakhs per year, together, you can potentially get a home loan of Rs. 40 Lakhs for 20 years!

 

Advantage 2 –Increase in Income Tax Benefits

We know that taking a home loan provides tremendous income tax benefits. (Please read “Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage” for more on this).

But when you take a home loan in joint names, and pay the EMI together, both the applicants get the income tax benefits.

And the best part is that the upper limits of tax benefit (Rs. 1 Lakh for principal repayment under Sec 80C and Rs. 1.5 Lakhs for interest payment under Sec 24) apply individually. That is, both you and your spouse (or co-applicant) would be able to claim IT benefits upto these limits!

(Please read “Saving Income Tax – Understanding Section 80C Deductions” to know more about IT benefits u/s 80C)

Depending on your income levels, this can be an enormous benefit!

Example 1

Let’s say you and your spouse both earn Rs. 6.5 Lakhs per year.

For the home loan, you need to repay Rs. 90,000 per year as principal, and Rs. 1,45,000 as interest.

If the home loan is in just your name, both these deductions would be available only to you. Thus, your taxable income would be:

Rs. 6,50,000 – Rs. 90,000 – Rs. 1,45,000

Which is Rs. 4.15 Lakhs.

The income tax saving would be:

(Rs. 1,50,000 * 30%) + (Rs. 85,000 * 20%)

= Rs. 62,000.

But if the home loan is in joint names, and both you and your spouse repay the EMIs equally, both of you would get equal benefits.

Thus, the taxable income for each of you would be:

Rs. 6,50,000 – Rs. 45,000 – Rs. 72,500

Which is Rs. 5,32,500 each.

The income tax saving would be:

(Rs. 1,17,500 * 30%)

= Rs.35,250 each, or Rs. 70,500 total – an extra gain of Rs. 8,500 in our example!

(Note: The calculation uses IT slabs applicable to FY 2008-09. To know about the applicable tax slabs, please read “Income Tax (IT) Slabs / Brackets – FY 2008-09 AY 2009-10”)

(To know the difference between FY, AY etc, please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)”)

Example 2

Let’s say you and your spouse both earn Rs. 10 Lakhs per year.

For the home loan, you repay Rs. 1,40,000 per year as principal, and Rs. 2,50,000 as interest.

If the home loan is in just your name, both these deductions would be available only to you – but subject to the upper limits (or caps). Thus, your taxable income would be:

Rs. 10,00,000 – Rs. 1,00,000 (for principal repayment) – Rs. 1,50,000 (for interest payment)

Which is Rs. 7.5 Lakhs.

The income tax saving would be:

(Rs. 2,50,000 * 30%)

= Rs. 75,000.

But if the home loan is in joint names, and both you and your spouse repay the EMIs equally, both of you would get equal benefits.

Thus, the taxable income for each of you would be:

Rs. 10,00,000 – Rs. 70,000 (for principal repayment) – Rs. 1,25,000 (for interest payment)

Which is Rs. 8.05 Lakhs.

The income tax saving would be:

(Rs. 1,95,000 * 30%)

= Rs. 58,500 each, or Rs. 1,17,000 total – an extra gain of Rs. 42,000 in our example!

 

Disadvantage of a home loan in joint names

There are these fabulous advantages of taking a home loan in joint names. So, is there any downside?

Well, as such, there is no disadvantage. But you might want to consider the following from a long term planning perspective.

If both you and your spouse are working, you might want to buy another house sometime in the future.

Now, the income tax act says that if a person has more than one house in his name, one of them is treated as self occupied, and another is treated as let-out – even if it is not actually let out on rent.

You would need to pay income tax on the rent received if this second house is actually rented out. But if it is not rented out, it is deemed as rented out, and you would have to pay income tax on an amount that you would have received as rent as per prevailing market rates.

That is, you pay tax on an income that you are not even earning!

Why is this relevant in our discussion? Because if you have your house in joint name with your spouse (which is a precondition for availing a home loan in joint names), and if you purchases another house in the future, it would be treated as your second house!

If you buy your first house in a single name, the other house can be purchased in the name of your spouse – thus, both of you would have just one house, and won’t have to pay income tax on an income that you don’t even earn!

(Of course, if you actually rent out the second house, this becomes irrelevant)

Again, as mentioned earlier, this is relevant only from a long-term planning perspective.

 

What should you do?

So, should you go in for a housing loan in joint names or not?

Take the home loan in joint names if:

  • You need a higher loan amount
  • The income tax savings by opting for a joint loan is significantly higher than a single-name loan

Avoid taking a home loan in joint names if:

  • You can do with the loan amount available as a single applicant
  • The income tax savings by opting for a joint loan is not significantly higher than a single-name loan
  • You plan to purchase another house in the future

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