Hybrid Home Loan Makes A Comeback With SBI’s New Offering

  Author: Naveen Kumar

Flush with cash after huge about cash deposits by the public in the aftermath of the government’s demonetization of Rs 500 and Rs 1,000 notes, banks were expected to give home loans a push. Now India’s biggest lender, State Bank of India (SBI), has come up with hybrid home loans effective from January 1, 2017. Women are being offered lowest fixed interest rate of 8.5% p.a for the first two years while other borrowers will need to pay 8.55% p.a.

Hybrid loan primer A hybrid home loan is a home loan which charges a fixed interest rate for initial few years and then it is converted into a floating rate loan. The floating rate home loan is linked to a benchmark interest rate which is currently the MCLR (Marginal Cost of Funds based Lending Rate) on which a pre-determined spread is added to arrive at the floating rate home loan interest. Whenever the lender changes the floating rate, the borrower has to pay the changed EMI accordingly. However, in practice whenever the lender changes the interest rate, it prefers to keep the EMI unchanged and changes the tenure of the home loan till the time borrowers maximum age is within permissible limit.

Why SBI’s new hybrid loan is attractive Though fixed rate home loans offer a fixed interest rate for entire duration of the housing loan but it charges a premium in the housing loan interest rate. It is often 2-3 percentage point higher than floating rate housing loan. So, effectively it takes away the low interest rate advantage for a marginal borrower looking for even small interest rate advantage. This is why during times of 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 at a low rate. This is also true for the latest SBI home loan offer. 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 bank is charging an interest rate of 8.6% p.a to its women borrowers while for others, it is charging 8.65% p.a. For floating rate home loans above Rs 75 lakh, it is charging its women borrowers interest rate of 8.65% p.a while it is 8.70% p.a for others.

Interest rates have generally been on declining for the last 2 years. However, after the home loan rate cuts being announced by banks recently, they are their lowest in the last 6 years. If you had been waiting on the sidelines for buying a home with a home loan for some time, this might well be an opportunity that calls for a closer look.