Why two is better than one in a home loan

A co-applicant applies for a home loan along with the primary borrower and is equally liable for repayments. Usually, close family members, such as spouse, children and parents, can be added as co-applicants. Adding a co-applicant to your home loan not only improves your home loan eligibility, but also reduces the chances of home loan rejection due to reasons such as insufficient income or high EMI/NMI ratio.

The lender evaluates the income and credit profile of the co-applicant that can help you secure a lower interest rate, higher loan amount, better loan terms and individual tax benefits. Do note that the co-owner of the property has to be the co-applicant of the home loan, but a co-applicant need not necessarily be the co-owner of the property.

Chances of approval

If the primary applicant has a weak credit profile, adding a co-applicant with a strong credit profile increases the chances of approval of the loan application. Joint loan applications are considered less risky by the lenders since both applicants are equally responsible for EMI repayments. A co-applicant with a higher income and a strong credit score strengthens the loan application and reduces the chances of loan rejection.

Higher loan amount

Adding a co-applicant often increases the borrower’s loan amount eligibility. Individuals having insufficient income can add their immediate family members with a strong credit profile as co-applicants and get approved for a higher loan amount. Lenders assess the combined income of the applicant and the co-applicant during the home loan evaluation process, thereby increasing their chances of availing a higher loan amount.

Lower interest rates

The combined credit profile of joint borrowers often makes them eligible for lower interest rates. Also, many lenders may offer an interest rate concession of 0.05% to women borrowers. Thus, adding a woman co-applicant to your home loan can help reduce the overall home loan cost.

Individual tax benefits

Home loan borrowers can claim a tax deduction of up to ₹1.5 lakh on principal repayment under Section 80C and up to ₹2 lakh on the repayment of interest component under Section 24b every financial year. If the co-applicant is also the co-owner of the property, he/she can avail the available tax benefits in accordance with their contribution towards the repayment. Thus, both the primary applicant and the co-borrower can jointly claim a total tax deduction of up to ₹7 lakh on the repayment of principal and interest component every year.

Most lenders usually require their applicants to be not more than 70-75 years old at the time of loan maturity. Therefore, individuals planning to avail a home loan at a later stage of life have higher chances of home loan rejection or getting a shorter repayment tenure. Adding a younger earning co-applicant, like children with income, with a strong credit profile to their home loan can increase their chances of home loan approval and help them get a longer tenure. A right co-applicant with a strong credit profile reduces the risk of outright home loan rejection for a primary applicant, who otherwise might not have qualified due to their inability to meet the eligibility criteria of various lenders on their own.

Any default or delay in loan repayment, however, adversely affects the credit score of not only the primary borrower but also the co-applicant, which in turn impacts the eligibility to avail loans and credit cards in future for both applicants.

(The writer is CEO of Paisabazaar)