By Rajiv Raj, Director & Co-Founder of CreditVidya | 03-07-14 | Morningstar.in
Pritwish and Avradita Sen, a Mumbai-based couple in their 30s, are firming up plans to buy their first home. While choosing a home loan option, Avradita prefers a fixed interest rate while Pritwish thinks it would be better to opt for a floating interest rate. Similar to marriage, walking the middle path may be the best solution here. How so? They can opt for a hybrid home loan.
Hybrid loans are a combination of fixed and adjustable, or floating, rates that usually make the respective transformation after a few years. Under such an arrangement, your lender will offer you a fixed interest rate for the first 3-5 years of your loan tenure. During this time, your equated monthly installment, or EMI, will remain constant. Going ahead, the outstanding amount will carry a floating rate of interest.
- Such a loan helps individuals enjoy the benefits of both interest rate calculations. Predicting interest rate cycles can be difficult when the economy is not on a smooth path. With inflation as it is, Pritwish is of the opinion that rates will be high for a while and get lowered later. In such a case, a hybrid loan makes perfect sense for him.
- A hybrid loan can be the ideal option for couples like the Sen’s who cannot afford volatility in their monthly expenses in the first few years of their home loan. If the monthly outgo is fixed for the first few years, it will definitely help the Sen’s manage their finances better and save money for the future. Post the completion of this period, they are also expected to rise in their corporate careers when they would be able to afford floating interest rates, which could increase their EMIs if rates rise.
- Understand and ask your relationship manager about the details on the foreclosure front. Some banks allow you to foreclose the floating rate component of your loan in a rising interest rate scenario without a pre-payment penalty. Others will charge you a penalty for the same. On the other hand if interest rates are moving down, you will want to foreclose the fixed part. Check if a penalty is applicable for the same. Similarly, banks will also offer you the option to convert your fixed rate component into floating if the interest rate cycle goes down or vice versa when the interest rates are moving up. However, a fee is applicable for the same, and you will need to know about it upfront.
- Also check what benchmark is used for the floating rate component. As of now, there is no benchmark index for floating interest rates in housing loans. As a borrower, you must know which prime lending rate is your floating rate linked to. Currently, banks and housing finance companies have their own internal benchmarks, leading to variations in the floating rate. For instance, ICICI Bank’s floating rate for home loans is benchmarked to I-Base. In the case of HDFC, it is benchmarked to its Retail Prime Lending Rate, or RPLR.
- Opting for a hybrid loan may work out for those who are keeping an active track of the interest rate scenario. Sometimes a hybrid loan may be pushed forward by a lender to beat the competition with teaser rates. Be mindful of the fact that your EMIs are slated to rise later and you should be in a position to afford it. Proper analysis of your interest rates, especially the cap and the margin are important when you are considering a home loan. If both seem fairly low, in case of a hybrid loan, there is enough reason to opt for one.
- Different lenders have different processes to approve such loans and different administration fees. As a customer, do your homework and take care to understand every aspect of it.
Source : http://goo.gl/5smB3T