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Shanthi Venkataraman

A LITTLE bit of this, a little bit of that! That is what HDFC has attempted to offer its customers with its two in one home loan product. With interest rates flattening out, you may not be so sure of getting a floating rate loan anymore. Yet with a fixed-rate loan, you lose the advantage of enjoying possibly lower interest rates in the future. If you are undecided on whether to go for a fixed or a floating loan, then you may want to consider the 2 in 1 Loan, which provides you with a combination of the two.

How it works

You can split your loan into a fixed and a floating component. The proportion of fixed to floating depends on your risk-taking capacity. For instance, for a loan of Rs 10 lakh, the fixed part of the loan can be Rs 6 lakh and the remaining the floating part. The more risk-averse you are, the greater will be the fixed rate component. The current interest rates for a fixed-rate loan with HDFC is 7.5 per cent fixed and 7 per cent floating. These rates are applicable to the 2-in-1 product as well. The floating rate is benchmarked to a retail prime-lending rate (RPLR). This rate has been reset two or three times in the past year.

Your equated monthly instalment would vary with the combination of the fixed and floating component. On a fixed-rate loan of Rs 1 lakh for 20 years the EMI would be Rs 806 and a floating-rate loan Rs 776 — your EMI under the 2 in 1 loan option will probably be between the two figures. As and when the rates are reset, you have the option to pay the same EMI and adjust your tenure, or retain the tenure and pay a lower or higher EMI.

Flexibility

Once you have chosen the combination of fixed and floating amount, you need not be stuck with your decision. You are also allowed to change the mix — say from a 60:40 fixed to floating to an 80:20. This would, of course, attract a charge of 0.5 per cent, in case you increase your floating component and a slightly higher charge if you hike the fixed component.

If you wish to prepay a part of your loan, you will have to mention which component you want to adjust the amount against. For instance, if you prepay Rs 2 lakh, you can adjust it either against the Rs 6 lakh fixed component or against the Rs 4 lakh floating part.

You will be charged 2 per cent in case you prepay the fixed component. If you prepay the floating component, there will be no charge, provided you are not refinancing the loan from another bank.

Suitability

If you are uncomfortable with the risk of bearing higher interest rates, in case interest rates move upwards once again, then you may be better off taking a fixed rate loan and hope that your lender will reduce the interest rate, in case interest rates move downwards.

Those who choose this product will still have to make a call on the direction in which interest rates are headed, as the decision is left entirely up to the customer. While you are able to hedge your risk to a certain extent through this combination, you cannot eliminate it completely. Frequently altering the combination will attract higher costs.

If you are interested in the combination this loan offers you, you might also want to consider ABN Amro's split rate of interest as well, which has two options — one with an 80 per cent floating component and another with a 60 per cent floating component.

The bank also offers a slightly lower interest rate on the fixed component than the one it offers on a purely fixed rate loan.

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