Here we talk about teaser home loan its importance and when we should take it.
What are teaser home loans?
An adjustable-rate mortgage loan in which the borrower pays a very low initial interest rate, which increase after a few years. Teaser loans try to attract borrowers by offering an artificially low rate and small down payments, claiming that borrowers should be able to refinance before the increases occur.
The concept of teaser loan would mean that the first couple of years the loan would be on fixed rate basis and ultimately it gets converted to floating rate basis.
Teaser loans had created a buzz in the home loan market in India a few years ago. They were one of the most discussed loan schemes. Owing to critiques all round and a closer watch by RBI, many banks slowly withdrew advertisements of this product. Teaser loans are now back as ‘Part fixed loans’ or ‘Limited Term Fixed Loans’.
“Teaser Home Loan” is the unofficial term used to describe housing loans that carry ultra-low fixed rates in the initial years, but charge market-linked rates thereafter.
Normally, most Indian NBFCs and banks offer home loans at floating interest rates. The interest rate on the loan is at a ‘spread’ over the lender’s base rate. As the base rate changes, the interest arrears on the home loan jump up and down over its 15- or 20-year term. Click here to read about Should i fix my home loan
Why is it important?
Home loans are one of the few categories of loans in India where banks face a very low numbers of defaults, even amid NPA epidemics like at present. The worry in a teaser home loan, by offering borrowers ultra-low rates in the first few years, may attract them to take on a far bigger home that they cannot afford. In an increasing rate cycle, a transition from a fixed to a floating rate can well throw a salary-earner’s EMI calculations out of kilter.
In 2009-10, RBI’s worries on this score were provoked by the US housing and credit crisis in which several US mortgage lenders had gone bust after extending generous low-priced home loans to sub-prime borrowers.
This time around, interest rates seem to be headed down instead of up, which might actually work in favour of the teaser loan taker. But the Indian property market is today on shaky ground with falling new home sales, mounting inventories and cash-strapped builders. A collapse in property prices could easily land home buyers and their lenders in a soup if teaser loan schemes prove a runaway hit.
When should you opt for a teaser home loan?
Opting for a teaser loan is best suited in a rising interest rate scenario. When the interest rates are low, banks are usually unwilling to come out with teaser home loan schemes. The biggest USP of this scheme is the offering of loans at a lower interest rate in a rising interest rate scenario, and thereby offering borrowers a chance to save money on the loan repayment.
Before opting for a teaser home loan, read the fine print very carefully to understand all its consequences. As a loan seeker, ask the bank for a year-wise breakup of the interest rate that would be applicable, and the number of years before the loan gets linked to the regular base rate.
One of the biggest limitations in this scheme is the high likelihood of default. Since the rate of interest is lower for the initial few years as per the plan, many people are not able to adjust the increased EMI when the loan is linked to the normal rate of interest after the initial period.
So, keep a closer watch over the forthcoming changes in EMI.
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