Teaser rate war hots up

So what does a teaser rate home loan mean for the Indian consumer? It means that there is a low initial interest rate that is fixed for a specified period (one to five years) and the floating rate as specified becomes applicable thereafter. The dual home loan rate of HDFC may be in competition with SBI’s Easy Home Loan Scheme which offers competitive rates at least for the first three years.

This scheme, available for loans up to Rs 50 lakh, offers an interest rate of eight per cent in the first year and 8.5 per cent in the second and third year. From the fourth year, the borrower will have an option of choosing a floating rate that is 2.75 per cent below the State Bank Advance Rate (SBAR) or a fixed rate that is 1.25 per cent below SBAR. 

Teaser loans vs floating rate products
Interest rates are thought to have bottomed out and are widely expected to go up next year. These teaser loans provide a caution at least for the next few years.
After the teaser period is over, if your lender does not offer you market determined floating rates, you should switch your loan to another lender. The effective rate of these teaser loans are also fairly good and hence it should clearly be preferred over regular floating rate loans based on current market conditions. 

So what should a consumer look at, while choosing a lender based only on teaser rates? 

The big variable in most cases is the applicable floating rates after the initial period of fixed rates is over.

In working out the effective rates, it has been assumed that the floating rates will be what they are today. This may not necessarily be true as different banks may follow different strategies on floating rates at that time.

Think before taking the plunge
In October 2003, people had opted for a similar teaser rate home loan scheme floated by a foreign bank. It involved an interest rate of six per cent for the first year and 6.50 per cent for the second year (against the then prevailing rates of 7 – 7.50 per cent) and floating rates thereafter.

By the time the two year teaser period was over, the bank had lost interest in the home loan market and interest rates were jacked up to double digit levels even as the prevailing interest rates were still around 8.5 –9.50 per cent.

As a result, a lot of consumers were forced to switch their loans to other lenders. Another issue, people should take into consideration is a look at pre-payment and any upfront charges (processing fees/stamp duty/legal charges, etc).
 
But, perhaps the most important thing is the property itself. If you are buying an old property (greater than 25 years) or a resale property that has gone through many owners or an under construction property that is still in the initial stages of construction, then it might be useful to consider private lenders.

Can existing home loan consumers take advantage of these schemes?
On paper, all banks that offer these teaser products are offering it only to new customers and not to existing ones. So, if you are an existing loan customer of any of these lenders and want to take advantage of these schemes, you should switch your loan to another lender (i.e. become a new customer to that lender). All lenders offer the teaser rate products to existing home loan customers of other banks.

(The writer is CEO of Apna Paisa, a search comparison engine for loans, insurance and investments)

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