Home loan have interest rate that is 1-2% lower than the prevailing interest rates in the market and that low interest rate is offered for specific time period, say 1 to 2 years. After the honeymoon period (initial years where they have to pay low rate of interest) the borrower needs to move to floating interest rate existing at the specified time.
In India, teaser Home loan were introduced in January 2009. The initiative which was first introduced by State bank of India (SBI) was soon followed by other banks. In the present scenario where interest rates are supposed to increase in near future, home loan borrowers found the concept of teaser loans very attractive as they would have to pay low interest in the initial phase, but they seemed to ignore the fact that after completion of the honeymoon period, when the borrowers will start repayment at the floating rate, the shift in the EMI will be huge, resulting in disruption in their financial planning. The same results in increased default payments affecting the asset quality and profitability of the banks.
During last few months, RBI has expressed discomfort with banks who are lending home loans at teaser rates. In its second quarter review of monetary policy the limit for asset provision in the case of teaser home loans was raised from 0.4% to 2%. This will restrict the ability of banks to offer loans at lower interest rates in initial years. RBI was also concerned that borrowers were not intimated properly about how floating rates are estimated and what will be the implication of teaser rate after the initial low interest period. RBI also pointed out that the banks have been ignoring the repayment capacity of the borrowers while offering home loan rates. RBI also expressed concern about the fact that normal home loan borrowers are not savvy to estimate the impact of increased home loan rates after few years, and might default once the rates start rising.
Housing development and finance corporation (HDFC) has extended the scheme four times from December 2009. HDFC Chairman Mr. Deepak Parekh said that lenders of teaser loans should withdraw the scheme as RBI is quite unhappy with the product because customers are not able to realise the implication of teaser loans after the honeymoon period. HDFC has extended its teaser home loan scheme in October where borrower will pay 8.5 in first year (April 2011) and 9.5 in second year (April 2012). These rates were revised from previous rates of 8.25% and 9% for first year and second year respectively. The move was taken with the fear of losing their market share to the rival banks. Now, HDFC is not in favour of extending this scheme taking into consideration the additional asset provisioning mandated by RBI.
On the other hand State Bank of India says that the bank is still positive about their special loan scheme (Teaser home loans) despite RBI's additional provisioning on the scheme. The demand for residential loans has been rising since last few months and is expected to grow because of the upcoming affordable housing projects by many of the real estate developers. According to one of the rating agencies in India, it is estimated that from the total bank's home loan portfolio of approx 3.4 trillion in September 2010, 20-25% was linked to teaser loans rates.
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