The viability of teaser loans

The teaser loans are good for those borrowers who have a motive of prepaying their home loans in the first 5-6 years. But an important thing that needs to be kept in mind by these borrowers is that a prepayment penalty is attached with these schemes if they are repaid within 3 years of the tenor. Although the revived loan schemes are marginally costly than their earlier forms, but they are still a good deal for such borrowers.

Impact of base rate

The teaser loans have floating rates of interest attached to them from the third year onwards till the entire tenor of the loan. The floating rates are presently decided with respect to Prime Lending Rate (PLR) (e.g. 1.75% below SBAR for SBI and PLR minus 4.75% for HDFC Bank). In this context, one should keep in mind that PLR is soon going to be replaced by the base rate which is going to come into play from 1st July 2010.

Since it is a new barometer for loan pricing so nobody exactly knows what would be the interest rates after the third year as these loan schemes are ending on 30th April 2010 that is before the base rate actually comes into play. Hence the scheme would be ideal for borrowers intending to prepay within 5-6 years. Long term borrowers would be completely off track once the base rate comes into play.

Any decision by the borrower thus needs to be taken keeping in mind the benefits of the trade off between the attractive interest rates that these loans offer in the first two years of their tenor and the ambiguity that surrounds the scenario regarding the impact of base rates on the interest rates on these loans from the third year onwards.

Interest rates offered by banks now offering teaser loans

State Bank of India: It offers 8% interest for the first year, 9% for the second and third years and floating rate at 1.75% below SBAR (SBI's equivalent of prime lending rate, or PLR) after the third year.

HDFC Bank: It offers 8.25% interest for the first year, 9% for the second and the rates thereafter would be floating in nature and would vary depending on the amount of loan. For loans upto Rs. 30 lakh, the rate would be PLR minus 4.75% while for loans above Rs. 30 lakh, the rate would be PLR minus 4.5%.

ICICI Bank: It offers the borrower an interest of 8.25 % rate for the first year, 9% for the second and from the third year onwards, rates would be as per the prevailing floating rate.