Is it possible to borrow a home loan on Mutual Funds?
The demand for purchasing homes is only increasing. In fact, over the last two years only, the outstanding home loan has increased by ₹10 lakh crore in India.
Now, of course, buying a house is expensive.
It is more expensive than almost all our financial goals. This is why borrowing a loan makes the most sense in this case.
Now here’s the thing – If you’re a mutual fund investor, it makes sense to liquidate your portfolio to be able to afford your new home.
But what if there was a convenient option that allows you to borrow more than half of the Net Asset Value of your portfolio?
An option like borrowing a home loan on mutual funds.
Such an option will enable you to access the power of your mutual fund investments without diluting them.
Let us explore how borrowing a home loan on a mutual fund works.
Benefits of borrowing home loan on mutual fund
As a mutual fund investor, you might already know the benefits of mutual fund investing.
You also would know the benefits of borrowing through loans to meet your goals.
Now, if we combine the two—mutual funds and borrowing, what do we get?
We get a convenient process of fulfilling our goals while keeping our investments intact – mutual fund loans.
Here’s what it offers:
1. Access your portfolio without liquidating
You have already tried to select funds, schemes, and goal-based planning.
Availing a home loan on your mutual fund investments can help you access your investments without redeeming them.
This unlocks your investment benefits and pledging mutual fund units can help you borrow more from a portfolio that you already own.
Recommended: Can you get a loan against mutual funds in India?
2. Get your loan approved and disbursed quickly
Unlike conventional loans, no extensive paperwork is required.
After you have pledged your mutual fund units as collateral, your portfolio goes into a lock-in against which you can borrow funds.
Therefore, processing a home loan is easier and quicker than traditional loan approvals.
3. Maintain investment exposure
Imagine continuing your investment for your early retirement dream while fulfilling your home-buying dream.
Yes, that is what availing a home loan against mutual funds can empower you to do.
You don’t have to restart your investing by liquidating your assets, but make strides for multiple goals simultaneously by maintaining your exposure.
4. Let your investments gain through compounding
By not liquidating your portfolio, you can ensure that long-term compounding keeps adding power to your portfolio.
The longer you stay invested, the longer the compounding gets to work its magic.
However, you are also able to access your invested corpus through pledging.
Eligibility process for loans against mutual funds
Every lending institution that you approach for a mutual fund loan will have eligibility criteria that you are required to fall under before you can borrow a loan.
Important Read: Eligibility for personal loan against mutual funds
Here are some of the most important ones:
1. LTV (Loan-to-Value Ratio)
The loan-to-value ratio or LTV ratio compares the interest and principal amount to your appraised collateral value (your mutual fund units).
Banks and financial institutions can offer you a home loan or any other loan based on this factor.
Generally, home loans are offered at half (or in some cases more than half) of your pledged mutual funds unit’s market value. It can also go up to 80%.
So, if you have a mutual fund portfolio of ₹1 Cr, you can expect to borrow a home loan in the range of ₹50 Lacs to ₹80 Lacs.
However, the exact loan disbursement value would differ from lender to lender.
Therefore, you must always compare the LTV ratio among different lenders before deciding.
2. Impact on your investment goals
A collateral would lock in your portfolio for your loan tenure.
Meaning you won’t be able to sell your mutual fund units before repaying your home loan.
So, even though you continue to gain through compounding, you might be unable to redeem your mutual fund units.
Therefore, care should be taken not to pledge your emergency investments as collateral for a home loan.
Similarly, you need to measure the impact of your home loan on your pledged goal-based investments before proceeding with it.
3. Margin Calls Risk
While debt mutual funds can give you a certain degree of stability, equity-based mutual funds can be subject to short-term market volatility.
This volatility might cause your mutual funds’ unit value or your collateral value to fluctuate.
There is a minimum threshold or maintenance margin on your collateral. If the mutual fund investment’s value falls below this threshold, additional investments might be required.
This process is called a margin call, and it is a common measure to meet the lender’s requirements during a shortage of collateral.
This might impact your debt mutual funds, too, with the investment and reinvestment risks involved in them.
Are you eligible to borrow a home loan on your mutual funds?
There is general skepticism around whether a bank would approve your home loan and at what interest rate.
But borrowing a loan with a platform like 50Fin leaves no uncertainty.
Most importantly, you also don’t require a minimum CIBIL score.
Borrowing a home loan on mutual fund investments has never been simple. Apply for a home loan on your mutual fund investments now and start benefiting from your mutual fund portfolio in other ways too.
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