Whenever you applied for a home loan the bank or their agents gave you two options: Fixed or floating. Till now you too must have discussed and enlightened yourselves about the pros and cons of 'fixed' and 'floating' home loan rates. No more.
Now there is a third breed of home loan product which banks have creatively named as hybrid loans! Put simply, this home loan product is a mix of both fixed and floating.
Hybrid loans: What and how?
As the name suggests, this is a combination of both, fixed as well as floating rates, also known as partly fixed, partly floating home loan. Under this loan scheme, a part of your loan is locked under 'fixed' and the rest is under the adjustable rate of interest, called 'floating'. In fact this is a median option between fixed and floating interest rates.
This product is a 'mixed blessing' especially for those who are confused about the movement of interest rates and do not want to take a particular stance.
In case of hybrid loans, there are two loan agreements, one on fixed and the other on floating.
This means that if you take a home loan of Rs 20 lakh and you are unsure of interest rates then you can choose to take 60 per cent of Rs 20 lakh (Rs 12 alkh) as a fixed rate home loan and the remaining (Rs 8 lakh) as floating. The proportion can change based on your risk appetite. Your risk appetite would be high if you go for a higher floating component in a scenario where interest rates are likely to go upwards and vice versa.
In case interest rates move up, you have an option of foreclosing your floating component of the loan with no pre-payment penalties. In case you decide to foreclose the loan locked under the fixed portion, the standard two per cent pre-payment penalty will apply unless you have negotiated otherwise.
Another option available if interest rates go down is that you can get the fixed portion of your loan converted into floating. This can be done by paying a conversion fee of 0.5 per cent (or more) of the outstanding loan amount.
Very few banks offer purely 'fixed' or 'transparent' floating rates; most actually offer hybrid loans.
Banks like the State Bank of India offer SBI-Flexi Home Loans, HDFC offers 2-in-1 Home, ICICI offers Part Fixed, Part Floating, Bank of Baroda offers Flexi-home loans. All these products are hybrid home loans.
Fixed, floating or hybrid? Which one's for you?
Apnaloan.com CEO Harsh Vardhan Roongta says, "Firstly 'fixed' or 'floating' is not a one-time decision. You will need to keep reviewing your decision at least every six months. Currently Apnaloan.com recommends to its customers to opt for a floating rate loan. I am personally not a fan of mixed rates (partly fixed and partly floating) mainly because of the non transparency of the banks on both these rates. The so-called 'fixed' portion may be varied and there is no objective mechanism to ensure that the 'floating' rate also floats down. These risks remain even when you take a pure 'fixed' rate loan or a pure 'floating' rate loan but in any case you are not exposed to dual non transparency."
According to ICICI Bank, hybrid loans imbibe dual benefit of fixed rate loans as well as floating rate loans. With this product, a customer can book part of her/his loan under a fixed rate plan and the other part under a floating rate plan. Thus, s/he can minimise the impact of any adverse changes in the interest rate regimes and at the same time, avail of any benefits that may come by way of favourable changes. Part fixed, part floating can be availed by Resident Indians whether salaried or self-employed and also by Non-Resident Indians who are salaried.
It is always recommended that one revises the interest rate option periodically. Nothing can be a better safeguard than keeping an eye on the interest rate movement and see if a conversion or a change to another interest rate plan is a more viable option. However, if you are one of those who do not want to be on guard, hybrid loans might just do the trick for you.
So study your options thoroughly before entering into this arrangement called mixed or hybrid loans.