Joint Home Loan: Liability And Tax Benefits For Parents As Co-Borrowers

Parents typically become the co-applicant or guarantor when their children apply for an education loan. Joint loans, is however, a more common practice in home loans, where people usually take the loan jointly with their spouse, parents, or children. While there are benefits of taking a home loan jointly, there are certain risks, too. If as a parent you are taking a home loan with your children, here are some of the liabilities you must be aware of.

Here’s what one should keep in mind while being a co-borrower or a co-applicant in a loan.

Co-Borrowers And Co-Applicant

There is a difference between a co-borrower and a co-applicant. A co-borrower is one who shares the loan payment responsibility if the primary borrower fails to repay the loan. Usually, co-borrowers are the co-owners of the property as well. Lenders also prefer co-borrowers to be the co-owners.

The difference between co-borrowers and co-applicants is that co-applicants share the loan repayment liability, but unlike co-borrowers, may or may not have rights over the underlying asset.

In short, a co-borrower is usually a co-owner, but a co-applicant may or may be a co-owner.

Sharing EMI Payments: Is It Mandatory?

Pramod Kathuria, founder & CEO, Easiloan, a digital marketplace for home loans, says that the equated monthly instalment goes as one single combined payment. “The EMI is one, combined payment. Legally, the lender does not care who pays what proportion; they only care that the total amount is paid on time. It is a personal arrangement between the co-borrowers to split the payment.”

Sharing EMIs is not mandatory. The primary borrower is liable to repay the loan and the co-borrower is required to repay the amount in case of default in payment. The one who pays the EMI can enjoy the tax benefits, too.

Besides, a co-borrower’s credit score can also improve the overall credit score and thus the credit limit as well.

Tax Benefits For Co-Borrowers

Even if parents are co-borrowers, they can avail of tax benefits. Says Kathuria, “The parents are eligible to claim tax deduction only if they are also the co-owners and are paying the EMI.”

The tax deductions are available to both the principal borrower and the co-borrowers in proportion to the payment towards EMIs.

However, one should not forget that as a co-borrower, one incurs the liability of full repayment. So, one should carefully evaluate the loan application before applying for it as a co-borrower or co-applicant.

Becoming A Co-Borrower: What To Keep In Mind

Co-borrowers have the legal liability to repay the loan in case the primary borrower fails. “Parents have full and equal liability. This implies that the lender can pursue either of the borrowers to the tune of 100 per cent of the debt, not 50 per cent of the debt each. Their credit score will be affected directly, and default will harm their credit record and put their other assets at risk for legal recovery actions.”

“A co-borrower who is not an owner is not eligible to claim tax deductions”, says Kathuria.

In short, taking a joint loan may be good to improve overall credit score and increase the borrowing limit. For senior co-borrowers, joint loans come with their own risks, which they should not ignore. It is a long-term financial commitment, and one should consult a registered financial advisor or an expert to plan and manage borrowings efficiently.