All About Teaser Rates
May 6th, 2010 by rupeetalk.com
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The new home loan teaser rates have sparked off a fresh debate on the discriminatory approach adopted by banks in not letting their existing
customers benefit from the current low interest rates.At present, many private and public sector banks have been offering home loans at rates as low as 8 per cent while the benchmark lending
rate applicable to old customers remains as high as 10 per cent to 12 per cent.Banks have been reluctant to pass on the benefits of lower
interest rates to existing customers despite complaints of discrimination. The banks' terms and conditions have also been widely perceived to be opaque.A month ago, the Reserve Bank had voiced concerns over 'teaser' rates. Later, it
said the cheaper rates should be extended to existing borrowers as well, to which the Indian Banks Association (IBA) replied that if banks
offer lower rates to old customers as well, this will affect their earnings as it is not feasible for them to change their deposit rates accordingly to
compensate loss of interest from such a move.Home Loan : Apply for Home loan in India
Highlights- A teaser rate offers a fixed rate for two to three years between 8 to 8.5 per cent interest rate and floating thereafter.
- Typically floating rate should pass on the benefits of decreasing interest rates in the markets to the customers but so far banks have only increased the rates.
- A simple cost benefit analysis would give a clear idea for those who are looking to refinance their loan, as for new borrowers, have room for increased EMIs in future years.
The logic given by the banks is that their cost of borrowing funds through home loan in the past cannot be changed now and hence it won't be possible for
them to reduce the earning from the same fund.First, there was the real estate boom and then there were spiralling interest rates. Post slowdown, the interest rates have come down
immensely. While the concept of teaser loans opens up several interesting opportunities to existing and new home loan borrowers, there
are a lot of caveats too.Understand teaser rates:
Before we make some suggestions for borrowers, let us understand the concept of teaser home loans. This is how a
teaser loan looks like:It offers a fixed rate for two to three years between 8 to 8.5 per cent interest rate. It can be in the form of a
floating rate after teaser period at a declared discount to PLR.The catch lies in this floating rate. Even at current
PLRs, it will be in the region of 9.25 per cent-10.25 per cent, depending on the bank and the size of the loan. Now, all borrowers from 2008 or
earlier know that banks are very swift in increasing PLRs. And won't they lose new customers, because of high interest rates? Well, like
in the past, they will give higher discounts to new customers. Get it?Floating rates, when they were introduced in India in 2000, meant that the customers paid rates according
to market interest rates. But banks have only increased home loan rates so far. Why don't they do anything about it? There
is a prepayment penalty of 2 per cent which locks them to the high rates.Yes, one wonders what the RBI is doing. They have been making some noises and sending memos to banks 'requesting' them to be fair to
existing home loan customers. There is a chance that some banks will make some temporary superficial amendments, and go slow on PLR discounts for
a while. But, unless there is strong regulation protecting customers, one should not 'bank' on this.Read : Home Loan Guide
New borrowers:
This is a good time to borrow, if you are getting good rate for a property. Make sure that you have enough room for an
EMI increase after 2 years. For eg, an EMI of Rs 34,083 on a 40 lakh loan with 8.25 per cent interest for 20 years today will go up to Rs 36,455
or more after the end of teaser rates, when interest rate goes up to 9.25 per cent or more. Also, a small piece of advice for new borrowers:
don't buy an expensive piece of property just because the interest rates on home loans are low for two years. You should look for a better price instead of saving
two per cent over two years. (See below).Fixed cum floating (Teaser Rate) Floating interest rate Interest Rate 8.25% for first 2 years,
Avg. 11% for rest of 18 years9.25% for the first year,
Avg. 11% for rest of 19 yearsCurrent EMI Rs. 34,083 Rs. 36,635 Total Payable Rs. 9,626,334 Rs. 9,818,995 Old borrowers:
A good time to prepay and get a refinance on your loan. Most existing home loans taken in 2008 or earlier are at rates of 10
per cent or more. The teaser rates give you enough room to justify a 2 per cent penalty of prepayment an around 0.5
per cent costs for a new loan. Bargain hard, and make sure that you have a good discount on floating rates. A good
home loan consultant can explain the entire math and suggest ways for optimising your refinance deal.Published on May 6, 2010 · Filed under: Home Loan Articles; Tagged as: fixed cum floating interest rate, fixed interest rate, floating interest rate, home loan, home loan charges, home loan documentation, home loan penalties, home loan prepayment, home loan processing fees, home loan repayment, home loan sanction, teaser rates
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