Banks teasing customers more than ever

Lately we are seeing banks making news for their teaser home loan rates by which they are targetting new customers, but somewhat RBI is telling banks that this is injustice that is happening where only banks are  giving this option to the new customers and not old customers. But let us first look what this teaser home loan means in the first place, whether its a really good option that they are providing customers, or is it just a gimmick that the banks are into :)

This was a best article on Teaser home loan rates that I got on Economic times and this really gives one to know everything about these home loans actually.....

Lets see the Implications of teaser home loan rates:

Teaser Rates for home loans are now on their last leg. The State Bank of India (SBI) has extended the offer till the end of this month. LIC Housing Finance Ltd still has on its table, the dual rate offer called Fix-o-Floaty scheme.

Teaser Rates are very low interest rates offered for initial years by Banks/Housing Finance Companies (HFCBs). The rates offered are in the nature of fixed rates for the initial two or three years, and during the rest of the tenure the borrower will be charged floating rates of interest which will be much higher than the first few years.

Are Teaser rates real gimmicks?

Teaser rates are genuinely valid interest rates although they relate to a very small part of the loan tenure. To better understand the implications of teaser rates, an example from current day offers of two  organisations has been taken.

The comparison is also done with a typical floating rate scheme (referred to as non-teaser). The term is taken as 15-years (180 months) for a sanctioned amount of Rs1 lakh. (See Table for details.)

Validating teaser rates

An appropriate comparison could be done by computing the interest component. This is the excess of all payments made over the original loan sanction amount. But the acid test lies in working out the internal rate of return (IRR) for these three schemes.

Getting teased is good!

From the customer's point of view, teaser rates provide a definite initial advantage. The burden on the borrower is highest at the commencement of the loan and lowest at the end of the tenure. This is because the salary/business income of the borrower would increase with the passage of time whereas the EMI is constant during the entire tenure of the loan.

It is also at this time that small changes in specifications/interiors, etc of a house under construction may be necessitated. The borrower may have to fund these changes from his own finances. If the borrower had to pay for these from his/her salary, it would hit the cash surplus he/she would have, making the payment of initial EMIs very challenging.

Teaser rate schemes will provide much needed relief as the EMIs are lower when compared to the borrower not opting for teaser rates while considering loan options.

For instance, if the borrower approached SBI instead of a Non Teaser scheme,he would be getting a relief of Rs119 per lakh of loan in the first year.

This means the borrower can save in terms of hard cash, around Rs 2,380 per month in the first year for a loan of Rs 20 lakhs. This can be a big blessing!

From the HFCB's point of view, teaser rates do serve the purpose of attracting customers. At the same time, HFCBs do not suffer too much impact on their eventual earnings.

What is important is that the HFCB should appraise the repaying capacity on the basis of the 'mean EMI' and not the 'initial EMI'.

Otherwise the HFCB would be giving an open invitation for a       prospective NPA. That is a definite no-win situation for both the HFCB and the borrower.

The above analysis is limited to the extent of computation of Interest/IRR. Beyond these some freebies could be offered.

For instance, when its teaser schemes were on, GIC Housing Finance Ltd used to offer free insurance against accident and house property.

It also did not levy charges for part prepayments.

Processing fees vary from HFCB to HFCB. These need to be additionally factored in any decision in choosing a suitable HFCB.