Teaser home loans: Here today, gone tomorrow!

Teaser home loans are generally introduced into the lending system to serve a specific function, much like the super-sopper we see doing the rounds on a wet cricket ground.

They are there to sop-up excess liquidity that is threatening to lull the lending market into a state of inactivity. These loans are historically resorted to when the economic environment needs a catalyst to maintain momentum in the lending market.

Teaser home loans carry attractive interest rates and discount offers during the initial phase of the loan. After a specified time period, they relapse back to the then prevailing interest rates.

What do they have in their favour?

a. The loan rates are usually two or more percentage points lower than the regular prevailing interest rate.

b. They are usually dual loan rate schemes with an initial fixed number of years (usually 1 to 5 years) at specific interest rates with an option to move to floating rates at the end of the specified time frame.

c. With a decline in property prices and concepts like affordable housing coming into the picture these loan schemes will provide an economically viable option for first time home buyers.

Teaser home loan schemes is but an example of many such loan schemes that are positioned and packaged attractively to engage the a loan applicant's immediate attention.

Given below are some pointers to help you research and evaluate such options that are periodically out in the market.

How do I choose the best loan?

Compare total loan cost with the current parameters. At the outset, the current teaser home loan schemes differ in the range of 0.25-0.3 per cent at teaser rates.

One needs to factor in other costs like processing fee, service charges etc., to determine total loan cost at prevailing teaser rates. Only when the floating rates kick in, can one evaluate how much more interest outgo it will work out to.

Do I choose, a private lender or a PSU?

In the case of a public sector unit you may not get to choose -- more often than not, the bank might get to choose you!

PSUs are generally more risk averse than the private lender. There are very strict norms where eligibility is concerned. Everything is tied down to your loan repayment ability.

Teaser home loan eligibility

This being a discounted interest rate offer generally banks and particularly PSUs are more careful about the eligibility norms.

A. Does age of property matter?

The older the property, the higher the down payments or even the rejection rate, if the house has changed too many hands, etc.

Generally banks fund 85% of the project cost but older properties can bring this down even further.

Private lenders might be more approachable in the case of an old property based on more exposure and experience in handling such scenarios as part of their track record.

B. Should my property be pre-approved ?

When a bank has already verified the title documents of the property of a particular builder, it becomes pre-approved. This makes the loan sanction for a pre-approved property much faster and PSUs are particular about this aspect.

C. Does where I work and how long matter?

Employment history definitely matters. Your employment track record is also a yardstick to measure your loan repayment ability, apart from your company's credentials.

Three years is how long you are expected to stay in your current company to be eligible for a loan with certain PSU banks.

D. What is the role of a credit report?

This is very critical for the bank to gauge your repayment track record in the case of previous loans and credit card payments. A recent Reserve Bank of India directive allows you to now access your credit report. So make sure you get a copy and see how you fare.

How do I know the bank will not resort to steep increases in floating rates  later ?

Tracing the track record of the bank in such issues help a lot. You will notice a pattern in raising interest rates and RBI also has conducted surveys to understand this pattern across different banks.

Also remember that you can always opt to switch your home loan to a different provider or bargain with your current loan provider for a better interest rate once the teaser offer expires.

Even if there is a prepayment penalty it might be worth the shift if the new loan rates are more than 2-3% cheaper.

Remember to ask your bank :

a. What is my total loan cost?

b. When will the successive loan rates kick in? Will I be notified? (Check interest reset clause on your loan agreement).

c. Do I have the option of switching to a new loan scheme offered by you or shift my loan at any point during the loan tenure. Is there a charge? (Check prepayment penalty clause in your loan agreement).

d. When will the actual transfer of ownership take place after the loan is repaid?

e. Can I have a copy of the amortization table? This will show how you will repay your EMI. You will start by paying more of the interest rather than the principal in the initial years. So, when new interest rates kick in, it will apply on a significant percentage of the principal. This is key because floating interest rates could be higher for higher loan amounts!

Teaser home loans as stressed before were introduced into the lending stream to create the much need boost to the lending market.

Having achieved that with its introduction its now being slowly weaned out of the system with the loan interest rates all set to be spiked in the next quarter.

The newly introduced base rate system that is likely to swing into place from April 1 onwards will be a prelude to the possible hike in interest rates.

This is not to indicate that there maybe no more teaser home loan schemes at lower rates, it only means that they can be equal to or slightly higher than the base rate!