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Co-Applicant: Meaning, Tax Benefits, Eligibility, & Responsibilities in Home Loans
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Although having a co-applicant is not mandatory for a Home Loan in India, it offers several advantages. One key benefit is it gives the financial institutions an added level of assurance about timely loan repayment as the responsibility is shared between two individuals.
Yes, a co-applicant can be added to an existing Home Loan, but it usually requires a novation or re-application with the bank. This means the borrower will transfer the loan to their name and the co-applicant will be added as a joint applicant.
A co-applicant can have a different address than the primary borrower while applying for a Home Loan. However, the financial institution may require the co-applicant to provide proof of their current address for documentation purposes. It is important to note the co-applicants income and creditworthiness will also be considered while evaluating the Home Loan application.
Sometimes, a co-applicant can be removed from a Home Loan, but the process varies among banks.
There are several benefits of adding a co-applicant:
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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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In India, the dream to own a home is on everyone’s checklist that they want to achieve someday. Many start financial planning early, aiming to achieve the dream of having their own house. Financial institutions support this by offering attractive Home Loans to individuals at favourable interest rates.
Nowadays, homeownership is possible, especially for those with good credit and financial stability. However, for those facing low credit scores, they can think about applying for a Home Loan with a co-applicant, ensuring homeownership remains within reach.
What is a co-Applicant in Home Loan?
When it comes to Home Loans, a co-applicant is another borrower who applies for the loan along with you. They improve your loan eligibility and share the responsibility of loan repayment, potentially boosting your chances of loan approval. Co-applicants serve as valuable companions in securing your dream home.
Who Can Be a co-Applicant for Home Loan?
Selecting the right co-applicants for a Home Loan is essential. The most common co-applicant combination is spouses, leveraging both incomes for eligibility.
Another option is a father-son or brother-brother option, though approval depends on the bank's policies. An unmarried daughter can also co-apply with either or both parents, broadening the spectrum of co-applicant possibilities. Understanding these dynamics ensures a smoother Home Loan application process.
Example of Co-Applicants in India
Spouses or Domestic
Partners
Married couples or legally recognised domestic partners who apply together for a Home Loan.
Parents and Children
Parents can co-apply with their adult children and vice versa, combining incomes and credit scores.
Siblings
Brothers and sisters can co-apply for a Home Loan, with financial institutions assessing each applicant individually.
Co-applicants v/s Co-Signers
It is confusing to understand the exact difference between co-applicants and co-signers. Let’s understand how they are different:
A co-applicant is often the co-owner of the property who is involved in the loan repayment process.
A guarantor who makes sure that if the primary applicant defaults, they will pay the loan. They are not directly involved or benefited.
They actively repay the loan along with the primary borrower.
They step in only if the primary borrower fails to pay the loan.
Usually a co-owner of the property.
Has no ownership of the property.
Fully responsible for EMI repayment.
Only responsible if the borrower defaults.
Eligible for deductions under Section 24(b) and 80C.
Not eligible for any tax benefits.
A co-applicant improves the loan eligibility as the banks see the credit score of both applicants. One can also increase the loan amount.
Not considered in loan eligibility calculation.
Spouse, parent, or sibling buying property together.
Friend or extended family member supporting the borrower’s credibility.
Common Myths About Co-Applicants
If you are a co-applicant in a Home Loan, don’t think that you are just the backup. It is important to understand that co-applicants have equal rights in all the processes right from co-owning a home to repaying the loan together. Let’s bust some myths about co-applicants:
1. Only spouses can be co-applicants
Spouses are the most popular co-applicants for Home Loans, but it doesn’t mean that they are the only ones who can be co-applicants. Banks also consider other close family members to be a co-applicant like parents, siblings, or children (in certain cases) to be co-applicants.
2. You can remove a co-applicant anytime
You can’t remove a co-applicant randomly. It has a proper process that needs to be followed. You will need the bank’s approval, legal documentation and sometimes
even refinancing the loan.
3. Co-applicants are only added to increase loan eligibility
Yes, they help you boost the loan eligibility as dual incomes are involved. However, they also carry equal financial and legal liability for the loan.
4. Co-applicants must live in the same house or city
It is a common misconception that co-applicants living in different addresses cannot apply for a joint Home Loan. However, their place of residence doesn’t affect their eligibility, as long as they meet the bank’s relationship and documentation criteria.
5. Only the primary borrower is responsible for loan repayment
In the case of a joint Home Loan, both applicants are equally responsible for the Home Loan. If the primary borrower defaults, the bank can demand repayment from the co-applicant as well.
Benefits Of Having A Co-Applicant In Home Loan
Make your Home Loan journey smoother by exploring the benefits of having a co-applicant. It offers several advantages:
The co-applicants need not always be co-owners of the property in the home-buying process. Furthermore, co-applicants are legally bound to repay the Home Loan if the principal borrower fails.
They say, “Share the burden, and it becomes easy to carry.” The same can also be said when it comes to Home Loans. With a co-borrower's help, Home Loan repayment becomes easier.
Tax Benefits When You Add A Co-Applicant To Your Home Loan
When you add a co-applicant to your Home Loan, you double the tax benefits. Here’s how:
1. Interest Deduction Under Section 24(b)
Each co-applicant and the co-owner of the property can claim a deduction of up to Rs. 2 lakhs per financial year on the interest paid.
2. Principal Repayment Deduction Under Section 80C
Under Section 80C of the Income Tax Act, each co-applicant can claim a deduction of up to Rs. 1.5 lakhs per financial year on the principal component of the Home Loan repayment.
3. Eligibility Criteria to Avail Tax Benefits
To claim these tax benefits:
Only being a co-applicant for the Home Loan and not the co-owner of the property does not entitle one to tax benefits.
4. Additional Benefits for Women Co-owners
Women enjoy additional benefits when it comes to lower interest rates on Home Loans. Hence, it is a good idea to consider adding a female co-applicant (also a co-owner) to get the same benefits.
5. What Are The Responsibilities Of The Co-Applicant?
The co-applicant in a Home Loan shares the responsibility of repaying the loan with the primary borrower. They are equally liable for the repayment of the loan amount. In addition, the co-applicant must also provide their financial information to the bank, which helps to improve the eligibility for a Home Loan.
If the primary borrower defaults on the loan, the co-applicant is responsible for repaying the outstanding amount. Therefore, the co-applicant must maintain a good credit score and ensure timely repayment of the loan amount.
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