Teaser rates are back

HDFC, the largest player in the home loan business, has revived teaser rates although Chairman Deepak Parekh had earlier dismissed such schemes as marketing gimmicks. With the State Bank of India (SBI), the country's largest bank, turning aggressive in the home loan market, HDFC is not taking any chances. Here's a primer on the concept.

What are teaser rates
It's an introductory loan scheme offering attractive fixed interest rates for a short duration on home loans, car loans and credit cards to lure new customers. The fixed interest rate under the scheme — which is much below the market rate — turns floating at the end of the scheme period. SBI was the first to kick off teaser rates in January 2009. Other banks followed.

How they work
If a home loan seeker opts for HDFC's new scheme, he will pay only 8.25 per cent fixed rate of interest till March 31, 2011, and 9.25 per cent for the next one year, i.e., up to March 31, 2012. The interest rate, then, will shift to a floating rate (which can change anytime in a month or a quarter or a year, depending upon the prevailing interest rate) for the rest of the loan term, say, the next 17 years, if it's a 20-year loan. The interest rate for later years would depend on the prevailing interest rate environment.

What buyers should watch out for
While teaser rates are a compelling proposition in a high interest regime, buyers should always consider their repaying capacity when the rates become normal. Remember, the teaser rates only hold for the first two or three years and, subsequently, your home loan reverts to a floating rate.

Global trends
Globally, teaser rates are popular on home loans and credit cards. But they have come under intense scrutiny from regulators everywhere following the subprime crisis in the US. Many feel teaser rates led to defaults by a large number of home mortgage owners who could not service the loan after the teaser rates lapsed. The RBI observed recently that the growing trend of teaser rate offerings by banks and housing finance institutions is a "cause for concern".