Should you go for the new hybrid home loan offered by SBI?

            Hybrid home loan is back with SBI offering a new one

With the dawn of the new year 2017 India’s biggest lender State Bank of India (SBI) has come up with hybrid home loans. Women borrowers have been given privileged treatment with lowest fixed interest rate of 8.5% p.a. for the first two years of the loan tenure. Other borrowers on the other hand have to pay a slightly higher interest rate of 8.55% p.a. for the same loan. The question which many borrowers have in their mind whether it is right for them to go for this hybrid home loan. Let us bring some clarity on this home loan and understand whether you should go for it.

How does a hybrid home loan work? A hybrid home loan is a loan that charges a fixed interest rate for initial few years after which the loan is converted into a floating rate loan. As suggested by the name, during the initial fixed rate period the interest rate remains unchanged. After completion of the initial fixed interest rate period the loan moves to a floating interest rate regime. The interest rate of a floating rate home loan is typically linked to a benchmark which is currently the MCLR (Marginal Cost of Funds based Lending Rate) for the banks. The lenders adds a pre-specified spread or margin over this benchmark rate to arrive at the final floating interest rate for the home loan borrowers. With interest rate movement in the economy whenever the lender decides to change the floating interest rate then all borrowers with floating rate loans get affected, sometime favourably as is the current case of falling interest rate and sometime adversely when interest rate is hiked. Borrowers have to pay the changed EMI accordingly. However in practice whenever the lender changes the interest rate it prefers to keep the EMI unchanged and only changes the tenure of the home loan. However it is done only till the time borrowers age remains within highest permissible limit till the closer of the home loan. Beside the new hybrid home loan SBI continues to offer the floating rate home loan as well, however at a slightly higher interest rate. For a floating rate home loan upto Rs 75 lakh the lender is charging an interest rate of 8.6% p.a. to its women borrower while for other borrowers it is charging 8.65% p.a.. For floating rate home loans above Rs 75 lakh it is charging its women borrowers an interest rate of 8.65% p.a. while 8.70% p.a. to others.

It works better during low interest rate period: Though fixed rate home loans offer a fixed interest rate for entire duration of the loan but it charges a big premium for this fixed commitment which makes it 2-3% costlier than the interest rate of a typical floating rate home loan. So effectively it takes away the low interest rate advantage for a marginal borrower who is looking for even small interest rate advantage. This is why during the low interest rate regime a hybrid loan becomes popular as it promises to lock-in the low interest rate at least for initial few years and that too on a very attractive interest rate. Often the hybrid loans offer an interest rate during fixed period which is better than even the prevailing floating interest rate which is also the case currently with the SBI home loan offer. 

Does interest rate outlook support your decision? Interest rates have been on declining spree for last 2 years since January 2015. At present the these loan rates have come down to the lowest level seen in last 6 years. If we have to gauge into the near future mostly upto an year or so then we can say with reasonable confidence that any further significant reduction from this level looks unlikely in near future. However the risk of an upward movement will always be there especially if there is any spike in inflation going forward. Therefore it would be a good call to go for a hybrid home loan especially for those people who have been waiting for an interest rate fall to go for their home buying as they can now lock their home loan interest rate at a very low level for at least next 2 years.