After initially playing down the teaser home loan product first introduced by SBI in January 2009, market leader HDFC has decided to join the bandwagon. They announced a similar teaser loan product on December 1, 2009. This clearly is a good time to be a new home loan customer.
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 (1 year to 5 years) and the floating rate as specified becomes applicable thereafter.
Given below is an analysis of the some of the teaser rates home loans available in the market for a 20 year home loan of Rs. 30 lacs.
|Bank Name||Initial Interest Rate||Effective Interest Rate||Comments|
|Bank of Rajasthan||7.5||8.53||7.5% fixed for the 1st yr, 8.5% fixed for 2-3 yrs, 4th yr onwards applicable floating interest rate (currently 8.75%)|
|Axis Bank||8||8.65||8% fixed for the 1st yr after 1 yrs MRR (currently 12.25%) minus 3.5% = 8.75%|
|SBI||8||8.76||8% fixed for 1st yr, 8.5% fixed for 2-3 yrs, 4th yr onwards it is SBAR (currently 11.75%) – 2.75% = 9%|
|SBBJ||8||9.08||8% fixed for 1st yr, 9% fixed for 2-3 yrs, 4th yr onwards the rate is SBAR (currently 11.50%) – 2% =9.5%|
|Canara Bank||8||9.33||8% fixed for 1st yr, 9% fixed for 2-5 yrs, . above 5 yrs BPLR (currently 12.50%) – 2.5% = 10% subject to min of 10%|
|HDFC *||8.25||8.63||8.25% fixed till 31st March 2012, thereafter prevailing floating rate (currently 8.75%)|
|LIC Housing Finance||8.9||9.44||8.90% fixed for 3 years and prevailing floating rate thereafter (currently 9.75%)|
Effective rates have been worked out assuming the floating rates will be what they are today.
*HDFC effective rate worked out assuming lower teaser rates are applicable for 24 months.
HDFC’s dual home loan rate 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 8 per cent in the first year and 8.5 per cent in the second and third year. From the fourth year, the borrower would 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.
Do teaser loans make more sense then regular floating rate products?
Interest rates are thought to have bottomed out and are widely expected to go up next year and these teaser loans provide a caution at least for the next few years. After 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. One should not forget the story of people who had gone in for a similar teaser rate home loan scheme floated by a foreign bank in October 2003 with interest rate of 6% for 1st year and 6.50% for 2nd year (against the then prevailing rates of 7 7.50%) 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 %. As a result a lot of consumers were forced to switch their loans to other lenders.
The other issue is that people should also look at pre-payment charges 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 the private lenders simply because they have developed expertise on dealing with the issues arising from such transactions.
Can existing home loan consumers take advantage of these schemes?
On paper all the banks that offer these teaser products are offering it only to these new customers and not to their existing customers. 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 the lenders offer the teaser rate products to existing home loan customers of other banks. Ironic but it is not available to their own customers.
So Teasers do make a difference in the lives of new customers as well as existing customers.