Hybrid Home loan - two options

Hybrid loan, according to RBI, is a two step mortgage. It is an ARM (Adjustable Rate Mortgage) that has one rate for part of the mortgage and a different rate for the remaining part of the mortgage. The interest rate changes in accordance with the market rates. The borrower, on the other hand, may have the option of making a choice between a variable rate or a fixed rate on the adjustment or agreement date. 

Hybrid loan products are popular options that package the advantages of both floating and fixed rate products.

Hybrid loans are popularly referred to as 'partly fixed partly floating loans' . This mixed option lends flexibility and greater choice to the home buyer. A part of the home loan is anchored under fixed rate and the rest is exposed to the prevailing floating rate of interest. This enables the borrowers to minimize the impact of adverse rate movements and benefit in times of favorable changes.

There are two options you can opt for after the fixed rate period of your loan is over. One is either you opt for a lower percent of your loan amount as floating and higher percent of the loan amount as fixed and vice versa, or the other option is you take a 50:50 for both the rates. Example for both the types is given below.

A homebuyer decides to take a loan for Rs 80 lakhs. If he feels that the rates are likely to move upwards in the coming months, he can lock 60 percent at a fixed rate. The remaining 40 percent is exposed to floating rate fluctuations. In case the interest rate goes upwards, the part of the loan locked under fixed rate remains unchanged. However, in the event the rate drops, the borrower will benefit only on the 40 percent of the loan that is under the floating component.

Some borrowers may decide to lock their loan at 50:50 under fixed and floating . This is the safest bet for homebuyers who cannot predict the future direction of rate movements. So the Rs 80 lakh loan is actually treated as two loans of Rs 40 lakhs - one at a fixed rate and another at the prevailing floating rate of interest.

So, your bank might ask you to sign two separate loan agreements-one for fixed rate of interest and the other for floating rate of interest. However, many banks may combine the same and use a single agreement for both the components. You must read the terms and conditions of your agreements with utmost care and your relationship manager is bound to explain to you, if you do not understand them.

When should you foreclose or convert from one component to other?

Under Hybrid loans, many banks offer you the option of foreclosing the floating component if the interest rates move up, with or without any pre-payment fees. And if the interest rates move down, may foreclose the fixed part, with or without pre-payment penalty, as per banks policies. Other banks offer you facilities such as converting your fixed portion to floating if the interest rates move down and converting the floating rates into fixed, if interest rates move up. Of course you will be charged a certain amount of fees for doing so, which can more often than not, be negotiated.

Some examples of hybrid loans include State Bank of India's offer of SBI-Flexi Home Loans, HDFC's 2-in-1 Home, Part Fixed,-Part Floating loan by ICICI and Bank of Baroda's Flexi-home loans.

Though RBI discouraged the hybrid home loans for a period of time, now they are back again after a break of two years. Hybrid loan is recommended to those who are not ready to accept the frequent fluctuations in the EMI or for those who have to get used to the home loan for a period of time.A hybrid loan bails a borrower out of the dilemma of choosing between a pure fixed and a floating product.