Making spouse co-owner makes sense

Your capacity to repay a home loan may get affected in the long run if you get carried away by the latest offers from lenders. A study by R.P. Deshpande

This article is the third in the four-part series that is attempting to focus on the repercussions intrinsic to ‘extended tenures’ offered newly in the home loan segment.

The website of State Bank of India advises people on how to become eligible for a higher quantum of loan and suggests the following:

* Add income of your spouse/son/daughter

* Add expected rental income of property to be funded

* Add depreciation

* Add regular income from other sources

Let us analyse how it will help the applicant to get a higher loan amount by adding these incomes and how it will affect repayment later.

Since the loan eligibility depends on the cost of property to be acquired (normally loan amount is limited to 80 per cent of property cost, i.e., loan to value ratio of 80 per cent) and on the repayment capacity of applicants (normally EMI would be limited to 50 per cent of net income of applicant), adding income of family members would increase the loan eligibility.

Let us take the example of Prakash, who is 40 years old with a salary of Rs. 30,000 p.m, has zeroed in on a house costing Rs. 30 lakh and is looking for a home loan of Rs. 24 lakh. On his income, his loan eligibility works out to 15 lakh with an EMI of Rs. 14,476 at 10 per cent interest. His wife, 35 years old, is a teacher in a Government-run school and draws a salary of Rs. 20,000 pa. If her income were to be added to the income of Mr. Prakash, he would be eligible for the required loan of Rs. 24 lakh. Then the EMI would be Rs. 23,161, which would be 46 per cent of combined income.

Adding the spouse’s income is an ideal choice, as the spouse is supposed to be with the husband for a lifetime. Making the spouse as co-owner makes sense for maximising income tax deductions available on the repayment of home loan. Adding the income of spouse has been a sound practice since long. But adding the income of the applicant’s son/daughter may create problems in the future. Let us take the example of Rai, 50 years old, who has two sons and one daughter, who are all staying together. The elder son is employed with a salary of Rs. 20,000 pm and the other son and daughter are still studying. Since Mr. Rai is not eligible for the required loan amount, the bank suggested that he add the elder son’s income so as to become eligible. A 20-year loan was advanced. After 10 years of repayment, the elder son got transfer orders and had to shift to another city with his family. Citing financial constraints, he informed his father that no more would he be able to share the burden of paying EMIs. Mr. Rai was unable to bear the entire EMI as he had retired from service and the pension was meagre. Since the younger son was still studying and the daughter had got married, Mr. Rai could face hardships beyond imagination and may even stand to lose the property.

Legal hassles

In these days of nuclear families, taking a loan along with family members could land such borrowers in a soup in the later years of repayment. While family members would like to share the property with parents, they may not be interested in sharing the EMIs. Along with financial problems, there could be a number of legal problems on owning the property mortgaged. If the property is an ancestral one, on which loan is availed, all legal heirs will have equal rights over the property, while father along with only one son/daughter is co-applicant to the loan availed. After some time, other legal heirs will fight for the property but will not acept the loan liability. If the property is self-acquired, and only one son is co-applicant (property jointly owned by father and son) to the loan, and if he disagrees to share the EMI burden after leaving the parents’ house, other family members, who are not owners of the property, may not share the EMIs.

Availing oneself of a loan by adding the income of the daughter could prove to be more problematic as after marriage she is bound to leave her parents’ place and start her family. In such a situation, she may not in a position share the EMIs of her father.

A number of legal hassles may crop up among family members, straining the repayment schedule. Since home loan is a long-term liability, the possible death of the father may create a rift between legal heirs, which would lead to default in loan repayments.

Hence enticing people to take a higher quantum of home loan by adding incomes of family members other than spouse could prove to be a bad precedent.