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Teaser Home Loans.

Now-a-days, to be in sync with the market leaders, many banks offer a fixed interest rate for a particular number of years and then offer an option their prevailing floating or fixed rate. However, here's an insight of what actually happens!

Harsh Roongta

23 Oct 2009

The home loan market has re-energized over the last two quarters by the reduction in property prices and interest rates. Other factor which has led to the spurt in demand in the home loan market are teaser loans offered by various PSU banks. 

 

The PSU banks have come out with offers where they are offering low attractive fixed rates for the first 3-5 years (8-8.5%) with rates reverting to the standard floating rate after that period is over. These kind of loans are popularly referred to as teaser loans where rate in the initial years is fixed as well as low. On the other hand private sector lenders are offering floating rate products which are reasonably priced but are floating from the first day itself. In fact the effective rates of PSU lenders, after factoring in the floating rates at the end of the teaser period is more or less in line with what the private sector lenders are offering (see table). Yet the customers are clearly  exhibiting a marked preference for the teaser loans from the PSU banks.

 

Home Loan interest rates for 20 years, loan amount of Rs.30 Lakh -  as on October 23, 2009           

-----------------------------------------------------------------------------------------------------------------------------                                                                                      

BANK                                                     For first year                       Overall effective rate                                     

-----------------------------------------------------------------------------------------------------------------------------

SBI Easy home loan ***                       8                             8.76                                         

CANARA BANK **                                   8                             9.33                                         

 HDFC                                                      9                               9                     

ICICI BANK                                             9.25                         9.25                                         

AXIS BANK                                             8.75                           8.75                                         

-------------------------------------------------------------------------------------------------------------------------------                                                                                     

                                                                   

***SBI offers 8% fixed for the 1st yr, 8.5% fixed for the next 2 yrs, 4th yr onwards borrower has an option of choosing either floating rate which will be 2.75% below SBAR or fixed rate which will be 1.25% below SBAR.                                                                                                                                 ** Canara Bank offers 8% fixed for 1 yr, 9% fixed for next 4 yrs, thereafter min. 10% for loans upto Rs 30 lakh.          

                                               

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The reason is not very far to seek.

 

Firstly the public sector banks are offering fixed rates for the next few years at a time when interest rates are widely expected to go up in the near future. So this feature clearly gives some element of safety and comfort to the home loan customers.

 

Secondly, clearly the public sector banks have been far more responsive in reducing rates for existing customer when rates fall, thus making them more comfortable with a floating rate product (after the teaser product) from a PSU bank v/s private sector bank.

 

This is based on the data culled from the report by the committee set up by RBI on BPLR which says, An increase in the repo rate was observed to bring about a contemporaneous change in modal BPRLs of private sector banks and major foreign banks and a lagged response in the case of public sector banks. A decrease in the repo rate had a significant contemporaneous impact only in the case of public sector banks. This asymmetric response shows that while public sector banks were slow to respond to an increase in policy rate, they were quick on the reverse. This could be attributed to the ownership structure of public sector banks which makes them more amenable to moral suasion by the authorities.

 

Of course one place where the private sector lenders score is the door step service they offer to their customer, though public sector banks are also fast  catching up now.

 

Our talks with various players in the market bears this out: 

 

On teaser loans, DSA Mr. Varun Punani of Sriram Capital shares, Introduction of teaser loans and the subsequent promotion of these schemes have worked well with the home loan customers. This has attracted lot of customers for new purchase and also for balance transfers. Now that SBI is giving at 8% for first year and 8.5% for second and third year and Canara Bank giving at 8% for first year and many more following the footstep, the customer stands to benefit. But what we have noticed that customer attaches lot of importance to the service received from the bank and not so much to the rate particularly when he is making first time purchase. This is where private banks score hence nearly our 70-80% business is with them. Now fearing the competition even PSU banks have intensified their service oriented approach. All this has benefited the customer a great deal.       

 

So should you go to a public sector lender for a home loan if you are in the market for a home loan or wish to shift from your existing home loan lender? Of course, you should.

But do keep the following factors in mind:

 

  1. The PSU banks are a good option, if you are buying ready (or almost ready) flats directly  from a reputed builder as the legal documentation is not such a big issue in this case. If you are buying a resale property especially if it has passed through a couple of owners it may be more difficult. Even very old property (Older than 25 years) may also be an issue.

 

  1. loan eligibility is unlikely to be aggressive so if the amount of loan is a major consideration then may be the PSU banks may not be the right fit.

 

  1. You would need to personally visit the bank a couple of times, so if you are the type who is constantly juggling appointments, then this may also be a constraint.

 

Subject to the above, I will conclude here by saying that you should definitely seriously consider shifting your existing home loan to a PSU bank or taking a home loan from them.