Home Loan Against Fixed Deposit – Get a Secured Home Loan Using Your FD

A home loan against a fixed deposit (FD) is a type of secured credit where your existing fixed deposit with a financial institution serves as collateral. Taking a home loan against a fixed deposit can be a smart way to secure funds to purchase a new house. The loan amount you can avail against your FD depends on whether it is a cumulative FD or a non-cumulative FD and varies for every issuer. When availing a home loan this way, keep in mind that you may not be able to avail of the loan immediately. You can confirm the terms for this with your FD issuer.

A home loan against fixed deposit works by using an existing FD as collateral to secure a loan for purchasing or constructing a home. When you apply for this loan, the financial institution assesses your FD to determine the loan amount, which is typically a percentage of the FD's value. The loan amount usually goes up to 90% of the FD value, as per the lender's policies. 

Once the loan is sanctioned, you don’t need to break or withdraw the fixed deposit. The FD continues to earn interest, but the bank holds it as collateral during the tenure of the loan. The lender offers the loan at an interest rate that is generally 1-2% higher than the interest rate on your FD. As the FD serves as a form of security for the bank, it lowers their borrowing risk. 

Here are some useful features you can benefit from when taking a home loan against an FD: 

• Loan Amount: 

The loan amount offered is usually a percentage of the FD value. Typically, banks offer up to 90% of the FD value, though this can vary depending on the financial institution and the FD’s tenure. 

• Interest Rate: 

The interest rate for a housing loan against FD is often lower than that for personal loans, as the FD acts as security. The rate is usually 1-2% higher than the FD interest rate. This makes it an attractive option for those who have a sizable FD. 

• Tenure: 

The tenure for an FD-secured home loan is typically aligned with the borrower’s requirements, ranging from 5 to 20 years. This also depends on the loan amount and the bank’s policies. 

• Repayment: 

Repayment of a housing loan against FD is done through EMIs. However, the FD remains intact during the loan period, and the interest earned from the FD is typically adjusted towards the loan repayment. If the borrower defaults, the lender can liquidate the FD to recover the loan amount. 

A housing loan against FD can have some potential downsides that borrowers need to consider: 

• Risk to FD:

Since the FD is used as collateral, if the borrower fails to repay the loan, the bank has the legal right to liquidate the FD to recover the loan amount. This could result in the borrower losing their FD and the interest it generates. 

• Limited Loan Amount: 

The loan amount is directly tied to the value of the FD. This means that if the FD is not of a substantial amount, the borrower might not be able to secure the desired house loan. For larger loans, the value of the FD may not be sufficient to meet the required amount. 

• Lower Loan-to-Value Ratio: 

Typically, banks offer up to 90% of the FD value as the loan amount. This means the borrower may still need to arrange for additional funds from other sources if needed. Hence, it could be a financial strain if the FD is not large enough. 

• Interest Rate Higher Than FD Rate:

Although home loans against FD offer lower interest rates compared to unsecured loans, the rate is typically 1-2% higher than the interest rate on the FD. This means the borrower earns interest on the FD but pays a higher interest on the loan. 

• Inflexible Terms: 

The terms of a home loan against FD may not be as flexible as other types of loans. For example, the repayment terms might be fixed, and the borrower may not have the option to prepay the loan without incurring penalties. Additionally, the loan tenure might be shorter than that of a traditional home loan, usually lesser than the remaining tenure of the FD. 

• No Withdrawal of FD During Loan Tenure: 

The fixed deposit remains with the bank for the duration of the loan, and the borrower cannot access or withdraw the FD funds during this time. This limits the borrower’s financial flexibility, especially in emergencies, as the FD is tied up as security for the loan. 

To qualify for a home loan against a fixed deposit, applicants need to meet certain criteria, which may vary across different lenders. Here are the typical eligibility requirements: 

• Applicants must be at least 18 years old

• Both salaried individuals, self-employed professionals, and business owners are eligible

• The minimum FD amount should be ₹5,000 or as per the bank's specific policies

• The FD should have been in place for a minimum of 3 to 6 months

• The FD receipt must be endorsed as collateral in favour of the bank

• Only Resident Indian Citizens are eligible for home loans against FD. Non-Resident Indians (NRIs) may not be eligible, though some banks may offer exceptions under specific conditions.

• In some cases, a Hindu Undivided Family (HUF) can also pledge its fixed deposit to avail of a home loan against FD. However, the loan will be approved based on the creditworthiness and income of the family members who are responsible for repayment.
   

Financial institutions typically provide loans of up to 90% of the FD value. This depends on the principal amount, the FD’s tenure, applicant's credit profile, and the intended use of the loan, among other factors. 

To apply for a home loan against a fixed deposit, make sure you have the following documents ready along with the completed loan application form: 

• Identity proof: Aadhaar, PAN Card, Voter ID, or Driving Licence
• Address proof: Aadhaar, Voter ID, electricity bill, or rent agreement
• Financial proof: Last 6 months of bank statements, Form 16, ITR, etc. 
• Tax Documents: Form 15G/H for TDS exemption on interest, if applicable
• FD Details: Fixed Deposit receipts for the FD to be used as collateral 
   

Additionally, the lender may ask for other documents related to your identity, financial profile, and property details as per their policies. 

Disclaimer: The eligibility criteria and document requirements mentioned above are indicative and may vary depending on the policies of individual financial institutions. It is advised to check with your lender for specific terms, conditions, and any additional documents that may be required during the loan application process. 

Repayment options for a home loan against a FD are typically flexible and vary by lender. Here are some of the common EMI structures available: 

• Equated Monthly Installments (EMIs):

Many lenders offer the option to repay the principal and interest through regular monthly installments, similar to a traditional personal loan.

• Bullet/Lump-Sum Repayment: 

Some financial institutions allow the borrower to pay only the accrued interest periodically (e.g., monthly, quarterly, or annually) and then repay the entire principal amount in a single lump sum at the end of the loan tenure.

• Adjustment Against Maturity Proceeds: 

If the loan is not repaid by the time the FD matures, the lender has the right to automatically adjust the outstanding loan amount. This includes interest and any penalties, against the FD's maturity value and return any balance to you. 

• Overdraft Facility: 

The loan may be structured as an overdraft, allowing you to withdraw funds as needed up to a sanctioned limit. In this case, interest is charged only on the specific amount you utilise, not the entire approved limit. Repayment of the principal in an overdraft is flexible and often comes with no fixed schedule, as long as it's cleared before the FD matures. 

A Home Loan Against Fixed Deposit can be a smart choice when you need quick access to funds but wish to avoid liquidating your FD. Here’s when this option might be suitable: 

• When You Need Quick Access to Funds:

If you require a home loan urgently and don’t want to go through the lengthy approval process of a traditional home loan, using your FD as collateral can expedite the loan disbursal. Financial institutions typically offer faster processing since the FD serves as security. 

• When You Have Limited Credit History:

For individuals with a limited or poor credit history, securing a loan against an FD can be a viable alternative. Since the FD is used as collateral, the loan approval process doesn’t rely heavily on your credit score, making it easier for those with a low credit rating to get approved. 

• When You Want to Avoid Selling Your FD:

If you have a fixed deposit that you don't want to break prematurely, but still need funds for purchasing a home, a loan against FD allows you to retain the FD while accessing the funds. This helps you avoid losing out on the interest accumulation from your FD. 

• When You Want Lower Interest Rates:

Loans against FD generally come with lower interest rates compared to unsecured loans or credit card advances. If you’re looking for a cost-effective financing option with manageable EMIs, a housing loan against FD is a great way to access funds at competitive rates. 

• When You Need a Higher Loan Amount:

Financial institutions often offer loans of up to 90% of the FD amount, making it an attractive option if you need a higher loan amount than what a traditional unsecured loan might provide. If your FD is substantial, you can avail of a larger loan with lower interest rates. 

You can get a home loan against a fixed deposit by following these steps: 

• Assess the Eligibility Parameter

Check the eligibility criteria set by the fixed deposit provider that you need to meet to get the required funds against your FD.

• Check the Loan Amount Eligibility

If you are eligible for a loan, check the loan amount that the lender is offering against your FD. Most lenders offer up to 90% of the FD amount as a loan.

• Gather Documents

Check the documents that you need to submit to avail of the loan and keep them handy.

• Verification Process

Submit your loan application along with the required documents to the lender for verification.

• Offer Acceptance and Signing the Agreement

After the verification process, the lender will approve or reject your application. Once the lender approves your application, you need to accept the offer and sign the agreement. 

When applying for a Home Loan Against Fixed Deposit, understanding the process is crucial to avoid mistakes that can affect the loan outcome. Here are some common errors and key considerations: 

Common Mistakes

• Not Fully Understanding Loan Terms: Applicants often overlook the loan terms, especially the interest rate, which is typically higher than the FD rate. Ensure you understand how this affects the overall cost. 
• Borrowing More Than Needed: Many assume they can borrow the full FD value, but financial institutions typically offer loans up to 90% of the FD amount. Borrowing more than necessary can lead to unnecessary debt. 
• Ignoring FD Interest Benefits: The interest earned on the FD can be used to reduce loan interest. Don’t overlook this benefit when planning your repayments. 
• Not Reading the Fine Print: Applicants often miss key details like prepayment charges or penalties for missed payments. Always read the terms thoroughly to understand the total cost of the loan. 
• Underestimating the Risk to Your FD: Since the FD is collateral, any default could result in the bank liquidating the FD. This can impact your savings goals, so consider this risk carefully. 

Important Considerations

• Assess Repayment Capacity: Ensure you can afford the EMI based on your current and future financial situation. Borrow only what you can comfortably repay. 
• Compare Lender Policies: Different institutions offer varying loan amounts, interest rates, and terms. Compare options to secure the best deal for your needs. 
• Balance Loan Tenure and EMI: A longer tenure reduces EMIs but increases total interest paid. Choose a tenure that aligns with your repayment capacity. 
• Ensure FD Ownership: The FD should be in your name or joint names. If using someone else’s FD, ensure you have their consent and proper documentation.
• Understand Tax Implications: The interest earned on your FD is taxable, so consider the tax impact when planning your loan and repayment strategy.