Taking a Home Loan Against FD—Is It Possible?

Buying a home is everyone’s dream. A Home Loan is the best tool to finance a home buy. Getting a Home Loan has multiple benefits. Your savings are kept intact. This ensures liquidity and you get tax benefits as well. This makes a Home Loan an effective tax saving tool.

A Home Loan is offered with the home as a collateral. Until you make full repayment of the Home Loan, the banker/lender enjoys a right of lien on the property.

But can you actually take out a Home Loan on a Fixed Deposit? Currently, there’s no feature available on the market, exclusively for Home Loans. Personal loans can be taken against FDs, but home loans against FDs is unheard of. However, you can use the FD towards making the down payment of the home loan. Banks finance only 85% of the property value. You’re supposed to provide the balance. To finance this 15% of the home buy, you can take a loan against FD.

Here are the reasons why you can’t take a home loan against an FD.

Real Estate Costs are High

A Home Loan is a huge deal, since it can extend from 10 to 25 years, depending on your repaying capacity. If you only have an FD investment to cover the cost of a home, you might as well liquidate the FD and make on the spot home purchase, rather than take a home loan and pay interest for a 25 year tenure.

Interest Rates aren’t what you Expect

Secondly, when you take a loan against FD, the rate of interest would be 1% to 2% more than the FD interest rate. At the moment, you can get home loans for 8.5%. With banks switching over to MCLR, you can get a home loan at better rates. If you enjoy a good credit score, you can get a home loan for as less as 8% (Bank of Baroda’s new credit score based lending system).

After demonetisation, interest on FDs have fallen. They currently hover at the range 7% to 7.75%. Say, you take a loan against an FD, you’ll pay interest @ 8.0% to 9.75% (working on the basis that the loan rate is 1% to 2% more than FD rate). By now, you should see that getting  Loan alone is cheaper than taking it out against an FD.

Read Also: Invest Personal Loan in Fixed Deposit With High Interest Rate

On the other hand, if you’ve made an FD investment 4 years ago, when it earned on average 10% return on an FD investment and you’re taking a home loan at current rates (8% to 8.5%), then you’re better off taking  loan against the FD.

At the moment, there’s no reliable means of taking out a personal Loan against a Fixed Deposit, since that’s something not many people tend to do. But you can choose to break an FD or take a loan against it to finance the home loan down payment. This is something that many home loan applicants tend to do.