The home loan customer is always perplexed with the question of the right kind of loan which shall be easy on his pocket. The floating rate home loans which had witnessed a spiral in the rates have provided some relief to the customer by showing indications of a downward trend in last few weeks. The unpredictability of the rates in these loans is cause of major headache among all borrowers. On the other hand the fixed rate loans have the problem of higher interest rates while staying immune to fluctuations of the market. In such a scenario the hybrid loan products attempt to combine the best of both basic variants and offer the customer an option that can be called ‘partly fixed partly floating loans’.
Understanding the Concept of Hybrid Loans
Variously known as ‘teaser loans’ or ‘happy ending loans’ these products are innovations by the housing finance institutions in an attempt to retain their home loan customers who might migrate to other lending institutions for lower interest rates. Primarily these are adjustable rate home loans where the customer pays a fixed interest rate that is lower for the first two or three years and thereafter the rates will change as per the prevailing market conditions. The higher EMI that becomes applicable after the initial years become justifiable under the pretext that the income of the burrower would have gone up by then thus enhancing the repayment capacity.
The RBI Position on Hybrid Loans
The Reserve bank of India clarifies that though such loans are legitimate there are certain pre conditions which the banks must oblige while issuing these hybrid loans. As per the RBI these are essentially teaser loans which must meet the mandates that have been specified by the apex body in its provisions for protection of customer interest in home loan disbursement and repayment. In October 2010 the RBI had in fact discouraged this practice by introducing the standard provisioning from 0.5 % to 2 % as a result of which the banks had withdrawn such schemes. However the banks claim that since the initial fixed rate is as per the prevailing market rates they are not to be classified as teasers and thus do invite higher provisioning. The floating rate offered thereafter is as per the base lending rate of the bank and thus any cut in them at a future date will result in the floating rate being lowered.
The New Hybrid Loan Schemes
The hybrid loan schemes are back in the arena after a break of about two years following discouragement by the RBI. Here is a comparative chart between two such products recently launched in the market by ICICI and HDFC banks.
| Lending institution | Type of Scheme | Loan amount < Rs. 25 lakhs | Loan amount = Rs. 26 – 75 lakhs | Loan amount > Rs. 76 lakhs |
| ICICI Bank | Fixed – 1 year | 10.5% | 11% | 11.5% |
| Fixed – 2 year | 10.75% | 11.25% | 11.75% | |
| HDFC Bank | Fixed – 3 year | 10.75% | 11.25% | 11.75% |
| Fixed – 5 year | 11% | 11.5% | 11.75% |
(Note: When an individual opts for such a hybrid home loan @10.75% from the HDFC bank, his EMI will be now fixed for Rs.10150/- for the first 3 years against the loan of Rs 10 Lakhs. However if in case in 2013, the prevailing rates do come down to 8.5%, the EMI for the Rs. 10 Lakhs will then be Rs.8680/- but the individual will continue to pay the same pre fixed EMI for a year more. This implies that in the year 2013 alone, his losses on additional interest amount will be Rs 19360/-. The saving grace is that in the current scenario it is expected that the rates will initially go up by 50-100 basis points (0.5-1 per cent) in the near future before coming down subsequently after a couple of years.
The direct implication of taking a hybrid loan in current scenario is that:
- The customer might have to lose out on the predicted downward trend of interest rates, and will have to pay a higher EMI, while the actual interest rates are lower.
- The offered rates for the new hybrid and dual rate loans are actually higher for the larger loan amounts and for the others they are at par with the ongoing rates in market.
A New variant from Axis Bank
Also known as a ‘happy ending loan’ this innovative scheme by Axis Bank offers to actually waive 12 EMIs for a customer who takes a loan at the current floating rate and sticks to it for more than 15 years in a loan whose tenure is 20 years or more. The waiver may not be in the interest of the customer in case the rates show a long term rise but can significantly benefit in case of a downward slide of the prevailing interest over a prolonged period.
The SBI, Central Bank of India, Punjab National Bank, Dena Bank and IDBI Bank have also come up with innovative schemes that have several variations in the interest rates over the tenure of the loan repayment. It is for the customer to take a call on the right loan to choose from after careful analysis of the prevailing and predicted market conditions.
