Making decisions in uncertain times, is difficult. Home loan seekers face this dilemma of having to choose between fixed and floating rates in the changing interest rate scenario. With the new option of a loan with a combination of fixed and floating rates, the borrower is freed of this troublesome situation.
The changing interest scenario is putting home loan seekers in a new dilemma. The gap between fixed rates and floating rates has started widening and might widen further. For those still undecided about which type of home loan to opt for: fixed or floating, there is a new option available in the form of a combi deal.
Interest rates have been moving north. One of the first to react to this trend was HDFC, which hiked the fixed home loan rates in July by 25 basis points. Several other lenders followed suit. Floating rates have been left unchanged for now. For some home loan providers, the fixed and floating rates are at par now and for some, the fixed rate loan is 25 to 75 basis points more expensive than a floating rate loan. Floating rate options thus appear more attractive. However, what if the floating rates also start moving north?
THE MIXED OPTION
Some housing finance companies these days have on offer home loans with a combination of fixed and floating rates. In other words, a part of the loan is on a fixed rate while on the rest of the amount a variable (floating) rate of interest is charged. For instance, if one is taking a Rs.10 lakh loan, then Rs.5 lakhs would be at a fixed rate and Rs.5 lakhs would be at a floating rate. Some home loan providers also allow you to decide the quantum under each type of rate. The bank treats it like two different loans with two different rates of interest.There are variants under this mixed type of loan (combodeal) but the funda is simple; a borrower gets to make use of benefits under both types and reduce future risks as well.
HDFC and ICICI Bank offer this combo-deal type of a home loan product and allow their customers to customize the ratio between fixed and floating interest rates. For borrowers, this arrangement is useful since they can decide the quantum under both fixed and floating types as per their risk appetite and accordingly hedge their risks on both sides. The fixed rate to some extent allows one to determine the degree of liability since it is pre-determined. This mixed option is best suited for risk-averse borrowers who want to shy away from taking too much risk on interest rate fluctuations.
The disadvantage of this hybrid variant is that only the amount of interest on the fixed rate is known. If the interest rates take a free fall, one would gain from lower interest outgo, but lose when interest rates rise. The scenario is dependent on the bigger picture i.e. the economic scenario of the country.
FLEXIBILITY WITH TIME AS THE REFERENCE
In some cases the mix of floating and fixed is dependent on the time period i.e. the initial few years are on a fixed basis and the balance period is on a floating basis. This loan-type is being offered by ABN Amro (called the Super Saver Package) where one pays at a highlydiscounted rate of 6.5 percent for the first two years and then pays for the remaining tenure at the then prevailing rate of interest. The ‘Super Saver Package’ has been introduced based on customer research that revealed that one of the biggest concerns of the home loan customer today was his/her ability to manage the strain on monthly finances in the initial stages of the loan period given the expenses involved in setting up a new home. In response to this need, the ‘Super Saver Package’ is designed to help customers manage their financing requirements during the crucial first two-year period of the loan tenure. During this period, the rate of interest is significantly lower than the applicable floating rate of interest, thereby generating substantial savings for the customer.
This product is also designed to induce fence sitters in the market today to make a decision and exploit the savings potential it offers. The scheme also comes with a first-year free property insurance that insures the customer’s home against fire and natural calamities like earthquakes and lightning.