Synopsis

Kotak Mahindra Bank introduced a hybrid home loan product for borrowers. This loan allows locking EMIs at current low rates for several years. After this fixed period, the loan automatically shifts to a floating rate structure. Borrowers can choose lock-in periods of 39, 52, or 65 months. Read more to know what you should consider before opting this loan.

Home-loan borrowers typically have to choose between the flexibility of a floating interest rate and the certainty of a fixed rate. The current interest rates are close to one of the lowest levels seen in the last decade. What if you get an opportunity to lock your home loan EMIs at current low rates for several years, after which the loan becomes a floating-rate home loan?



Kotak Mahindra Bank's new Hybrid Home Loan attempts to offer this middle ground. Borrowers can lock their interest rate and EMI for 39, 52 or 65 months, after which the loan automatically moves to a floating-rate structure.



The product is available to eligible salaried and self-employed borrowers across India.

So, should you opt for Kotak's Hybrid Home Loan?



The answer depends less on the product being "fixed" or "floating" and more on the rate at which the hybrid loan is offered, where interest rates move from here and how long you expect to hold the loan.

What does the hybrid loan offer?

The main attraction of the product is predictability.



With a conventional floating-rate home loan, an increase in the repo rate can eventually translate into a higher borrowing cost. Depending on the lender's mechanism, the impact can show up through a higher EMI, a longer tenure or both.



With Kotak's hybrid loan, the borrower gets a defined period during which the rate and EMI do not change because of repo-rate increases.



If a borrower believes that interest rates have limited room to fall but could rise over the next few years, locking the rate today can provide valuable protection. A 65-month lock, in particular, gives almost five years of EMI certainty.



This can make financial planning easier, particularly in the first few years after buying a home, when borrowers may also have expenses such as interiors, children's education and other financial commitments.



On a conventional fixed-rate home loan, lenders typically charge a higher interest rate than a floating-rate home loan. However, a hybrid home loan usually offers a lower interest rate even during the fixed interest rate period.



As per Kotak, the hybrid loan is priced comparably with its floating-rate home loans and does not carry a separate premium for choosing the hybrid structure.



However, borrowers should compare the actual rate offered to them with the bank's floating rate as well as rates available from competing lenders before deciding.

But there is a trade-off

The key question is whether the rate lock is worth giving up the benefit of future rate cuts.



If rates decline, a floating-rate borrower can benefit from lower borrowing costs, while the hybrid borrower will continue at the locked rate until the fixed period ends. Therefore, borrowers should compare the actual hybrid rate with the floating rate available to them, including offers from competing lenders.



Even a small difference in the starting rate can matter over a large home loan. So, "no separate premium" does not necessarily mean the hybrid rate will be the lowest rate available in the market; the sanctioned rate should be compared directly with alternatives.

Who should consider it?

The hybrid loan could suit borrowers who:

• prioritise predictable EMIs for the next three to five years;
• are concerned about a possible rise in interest rates;
• believe rates have limited room to fall; and
• find the hybrid rate competitive with the best floating-rate alternatives.

A floating-rate loan may be preferable for borrowers who expect rates to fall, want to benefit from future rate cuts or are comfortable with changes in their EMI or tenure.

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