Opt For The Middle Path — Hybrid Home Loan
Delhi-based couple, Ankita and Prakash, finalised their dream home after a lot of effort and leg work. While in the bank to finalise their home loan formalities, Ankita was toying with the idea of opting for a fixed rate of interest as it would help her plan the budget accordingly but Prakash found the floating interest rate a better proposal.
The golden mean, in such a scenario, is a hybrid loan.
Makaan IQ throws some light on how you can enjoy the benefits of both types of interest rates.
What is a hybrid home loan?
Hybrid home loan is the fusion between the fixed and the floating rates of interest. Under this, the lender charges the fixed lending rate during the initial years, where the amount of Equated Monthly Instalments (EMI) remains the same. The floating rate of interest is charged on the outstanding loan amount for the remaining tenure.
According to the Reserve Bank of India (RBI), in case of hybrid home loan, where rates are partly fixed and partly floating, the floating part should adhere to the Marginal Cost of Fund Based Lending Rate (MCLR).
This type of loan is best suited for young working couples who cannot afford the unsteadiness of lending rates in the beginning due to overheads involved in availing of the loan and other daily monthly expenses. But as they climb the corporate ladder and get better paid, they can manage their finances and save ample money to sustain the ups and downs of floating lending rates.
How hybrid loans work
A hybrid loan is often called partly-fixed-partly-floating loan. It works on the Adjustable Rate Mortgage (ARM), which is a home loan with an interest rate that can change periodically. This means that EMIs can go up and down.
According to the hybrid loan pact, borrowers have a fixed-rate period during which the rate does not change, followed by the longer period during which the rate will change on the basis of the prevailing pattern.
Some examples of hybrid home loans in India are SBI Flexi Home Loans, HDFC's 2-in-1 Home, Part-Fixed-Part-Floating home loan by ICICI Bank, and Bank of Baroda's Flexi Home Loan.
It is recommended to first comprehend and then sign on the dotted line as the product is complex due to the presence of both fixed and floating-rate components in the contract.
Many lenders offer the alternative to foreclose the floating component if the interest rates move up, with or without the pre-payment fees, if you have negotiated well. The same option exists if the interest rates move down, and the fixed component has to be closed, without the pre-payment penalty, according to the bank's policies.
Good or bad?
It is clear by now that such a loan helps individuals enjoy the benefits of both sets of lending rates. With inflation, (as per the Consumer Price Index India April 2016 which is 5.39 per cent), the lending rates are expected to shrink. In such a case, a hybrid loan is a good proposition.
Hybrid loans help minimise the impression of any adverse ups and downs in the lending rates. Also, all hybrid loans can be switched by the borrowers as per their convenience. There is no minimum waiting period/ penalty, unless it is pre-specified in the loan contract or at times, during the fixed rate period.
However, hybrid loans have apparent risks attached to them. It is essential to examine the caps and margins while considering the home loan. If both seem to be fairly low as per market standards, then book an appointment with the lender.