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Hybrid Loans: Just a median option or more...

This loan is a combination of both, fixed as well as floating rates, also known as partly fixed, partly floating home loan.

Pooja Gawde

02 Jun 2008

Till now we have discussed and enlightened our readers of the pros and cons of 'fixed' and 'floating' home loan rates.

But there is an alternative too...Hybrid Loans!

So what are these hybrid loans?

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. 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 so 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; you can choose to take 60 per cent of Rs. 20 lakh as a fixed rate home loan and the remaining as floating. The proportion can change based on your risk appetite.

In case 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 2 per cent pre-payment penalty will apply unless you have negotiated otherwise.

Another option available if interest rates move up, you can get the fixed portion of your floating loan into floating. You can convert the fixed component into floating 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 interest rates, most actually offer hybrid loans.

Banks such as State Bank of India (SBI) offer SBI-Flexi home loans, HDFC offers 2-in-1 Home, ICICI offers Part Fixed, Part Floating, Bank of Baroda (Bob) offers Flexi-home loans. All these products are hybrid home loans.

But, is opting for a mixed loan a recommended option?

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 6 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, hybrid loans imbibe dual benefit of fixed rate loans as well as floating rate loans. With this product, a customer can book part of his loan under a fixed rate plan and the other part under a floating rate plan. Thus, he can minimize 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 favorable changes. Part Fixed, Part Floating can be availed by Resident Indian whether salaried or Self-Employed and also by Non- Resident Indian who is 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 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.