Tips for Co-Borrowing a Housing Loan with a Friend
Co-ownership of property with a direct family relation or spouse is usual in India. These days, people have overcome that norm and they are even ready to own properties with their friends for a holiday home or a guest house. Between friends, there is a notion that there would be very much transparency for any kind of communication back and forth. And there are a few who have an opinion that co-borrowing a housing loan with a friend might lead to conflicts later as it involves money.
While buying a property with a friend, some might opt for a loan and with it comes few challenges. Some of the challenges include the total loan amount that should be borrowed, credit history of both the borrowers in partnership and each other’s financial capability to repay the loan amount on a monthly basis.
For instance, to co-borrowing a housing loan for one of the flats in Tambaram with your friend for using as a guest house, there should be proper consideration about the challenges before getting into it seriously. Here are some of the challenges that occur for availing co-borrowing a housing loan with a friend:
1. Have a completely transparent conversation with the friend:
The first thing that you should do is to have a clear and transparent conversation with the friend about the property and the purpose of it. Lay your financial capabilities for the upcoming years, so as to find out the loan tenure and everything else that comes with it. Both of the parties involved should also consult with their respective close relatives to know their opinions about the same.
2. Choose the type of loan that you are going to avail:
Sit and discuss the type of loan that you both are going to take up with a lender. While doing this, make sure that you both decide the loan tenure, the monthly EMI that you both can pay and also consider the rate of interests for the borrowed amount.
With a co-borrower for the loan, both the parties can apply for income tax deductions on the repayment of the principal amount and also on the interest amount under Sec 80C and Sec 24 respectively. This deduction for the repayment amount is based on the purpose or use of the property- i.e. If it is for personal use or for renting out.
3. Consider a fair EMI that both of you can manage with:
This is something where both parties involved should come to a common conclusion. One might be ready to pay higher amounts of EMIs for short loan tenure and the other might not be able to keep up with it. When taking a loan, you and your friend should consider each other’s financial abilities and future obligations before coming to a decision.
4. Know each other’s credit history:
To avail a loan, both of you should have a decent credit history. Before applying for the loan together, it is advisable to be transparent to each other about the individual credit history. If even one of the applicants has a problem with the credit history, it could lead to the rejection of the loan application. Knowing the credit history also allows each other to know the financial discipline of transparency.
5. Also, draw up an agreement in case of problems:
Even among friends, there might be matters of conflict as it involves a huge amount of money. This could ruin the relationship and hurt each other badly emotionally and financially in some cases. It is better to draw an agreement that states both the applicants’ obligations and roles towards the property and the loan amount. Also, mention how the property will be used and how the bills will be split for maintenance and other expenses.