Fixed income safer for higher loan

With the Sensex down 20 per cent since the beginning of the year, many investors are feeling the pinch.

Besides the loss in value of investments, the use of your stock market investment as collateral had suffered.

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In applying for a housing loan, stocks or mutual fund units can be used as collateral to get a higher amount sanctioned.

However, the sharp fall in the value of even blue-chip stocks and the fear that things could worsen would have reduced the eligibility significantly.

Bankers, as a result, are advising debt instruments as collateral. "It is safer to pledge debt instruments because the loan-to-value is higher and these are less volatile," says R K Bansal, senior executive director, IDBI Bank.

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Keeping shares as security is similar to taking a loan against these.

Banks sanction loans up to a maximum 50-60 per cent of the current market value of securities.

If the current market value of shares is Rs 800,000, down from Rs 10 lakh (Rs 1 million) a year before, banks will sanction only Rs 400,000.

When you don't want to liquidate your investments, you can keep it as security and sell it when the markets move up, paying for the funding gap, says S Govindan, general manager, personal banking & operations, Union Bank of India.

However, a dip in share price could be a nightmare.

"That depends on the loan structure, varying across banks.

"Collateral can be taken to make up for the borrower's lower income or for enhancing the loan amount," says Arvind Hali, head, retail assets, Dhanlaxmi Bank.

If the investment is to support your income, banks can sell the shares or ask you to pay or provide extra investments to make up for the dip in share price.

In case it is supporting the LTV, you could be saved if the property price has risen to make up for the fall in share price.

Then, the bank may not sell the shares.

Bankers, therefore, advise not using investments to support a higher loan as you may or may not be able to support the baggage of a higher equated monthly instalment.

Alternatively, using fixed income investments may be safer.

On the other hand, debt instruments will yield only a fixed rate of return (between six and eight per cent), reminds R S Sangapura, general manager, retail, Canara Bank.

You can get up to 85 per cent of the value of investments in National Savings Certificates/Kisan Vikas Patras/Indira Vikas Patras and life insurance.

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Provident fund cannot be pledged, as it is not an instrument but an account.

When investments are kept as collateral, you need to transfer the ownership to the bank till the loan is fully repaid.

Some banks may not allow collateral for a higher loan; they, instead, ask to take the loan-against-investments route.

A rate of interest is levied.

The LTV, in this case, is the same as in collateral.

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Here, too, the loan-against-shares is costlier than fixed income. State Bank of India  charges 6.5 per cent above its base rate, which is 16.50 per cent yearly.

 And, 14.5 per cent on debt instruments.

A loan against fixed deposits comes with an interest charge of 2-2.5 per cent above the fixed deposit rate.

With SBI, you would be paying 11.25-11.75 per cent, cheaper than a loan against any other investment.