After initially playing down the teaser home loan product first introduced by SBI in January 2009 market leader HDFC LTD. has decided to join the bandwagon. They announced a similar teaser loan product on December 1 2009.
ICICI bank announced its own teaser plan on the weekend. 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.
|Initial Interest Rate
|Effective Interest Rate
|Bank of Rajasthan
|7.5% fixed for the 1st yr, 8.5% fixed for 2-3 yrs, 4th yr onwards applicable floating interest rate (currently 8.75%)
|8.25% fixed till 31st March 2012, thereafter prevailing floating rate (currently 8.75%)
|8% fixed for the 1st yr after 1 yrs MRR (currently 12.25%) minus 3.5% = 8.75%
|8% fixed for 1st yr, 8.5% fixed for 2-3 yrs, 4th yr onwards it is SBAR (currently 11.75%) – 2.75% = 9%
|8.25% fixed for 2 years , 3,rd,onwards it is FRR (currently 12.75%) minus 3.50% = 12.75% -3.50% -= 9.25%
|8% fixed for 1st yr, 9% fixed for 2-3 yrs, 4th yr onwards the rate is SBAR (currently 11.50%) – 2% =9.5%
|8% fixed for 1st yr, 9% fixed for 2-5 yrs, .Â above 5 yrs BPLR (currently 12.50%) – 2.5% = 10% subject to min of 10%
|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 and ICICI bank’s dual home loan rates are now in competition with SBI’s Easy Home Loan scheme which offers competitive rates at least for the first three years.
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 cushion 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 which might increase rates next year itself 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 floating and fixed rates of 7% and 7.50% respectively) 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. It is in this context that the PSU banks are likely to score over their private sector counterparts.
The report of the working group on Benchmark Prime Lending rate appointed by the RBI to look into introducing transparency in fixation of floating rates by the banks has remarked that An increase in the repo rates was observed to bring about a contemporaneous change in modal BPRLs of the private sector banks and major foreign banks and a lagged response in the case of the public sector banks.
A decrease in the repo rate had a significant contemporaneous impact only in the case of the public sector banks. In simple English what the group’s research showed was that the PSU banks were slow to raise floating rates for existing customers when repo rates rose and were quick to drop rates for existing customers when the repo rates dropped.
Off course the fixation of floating rates will hopefully be a little more transparent in the next few years but if doesnot home loan borrowers from PSU banks will hopefully not be required to make the effort to switch 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 (including PSU 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.