In your 30s? What is the best home loan for you?
Predicting interest rate cycles can be difficult when the economy is not in ship shape. In such a situation, opting for a hybrid loan may be the perfect solution to help you enjoy the benefits of fixed and floating interest rate.
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. Like in marriage, walking the middle path may be the solution here, as they can opt for a hybrid loan.
Are you cut out for a hybrid loan?
As the name suggests, a hybrid loan is one in which you can get a combination of fixed and a floating rate of interest on your home loan.
Under such an arrangement, your lender will offer you a fixed interest rate for the first 3-5 years of your loan tenure that will also keep your EMI fixed for the same period. The outstanding amount will carry a floating rate of interest.
A hybrid loan can be an ideal option for couples like the Sens 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 Sens 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 that will also increase their EMI accordingly.
The fine print
Different lenders have different processes to approve such loans and as a customer you should take care to understand every aspect of it.
For instance, 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 the 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 converting 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.
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 competition with teaser rates, but 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.
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.
Photographs: Uttam Ghosh/Rediff.com