A few years back, teaser home loans had created quite a buzz in the Indian home loan market. They were one of the most hotly discussed loan products as they allowed borrowers to enjoy a fixed rate of interest for the initial years of the home loan. However, after the agreed duration was over, the borrower was charged a flowing rate of interest.
Owing to widespread criticism and closer scrutiny by the Reserve Bank of India (RBI), several banks were forced to withdraw teaser home loans product from the market. But teaser loans are now making a comeback under the guise of ‘Limited Term Fixed Loans’ or ‘Part Fixed Loans’.
Understanding Teaser Home Loans
Teaser home loans or part fixed loans are loans offered at a fixed rate for the early few years of the loan tenure i.e. 2-4 years. Then, the borrower is charged a floating rate depending on the prevalent market rates at that time.
There are two types of teaser home loans available. Under the first type of teaser loan, the borrower can lock the entire loan for the decided fixed interest rate for the initial few years, and then shift to a floating rate later. In the second option, the borrower can lock up a part of the loan as fixed rate for the entire loan tenure and the remaining part as floating.
Also, some teaser home loans are offered at lower rates than the prevailing market rate for the fixed duration.
What you should know
Simply put, teaser loans in India have followed the US model of teaser home loans i.e. attracting consumers with the promise of lower interest rates. As a result, the Reserve Bank of India has been actively monitoring all teaser loans in India to avoid a crisis like the US subprime mortgage.
Before opting for a teaser loan, it is strongly recommended to read the fine print carefully to understand all its terms and conditions. As a borrower, you can ask the bank or financial institute for a year-wise breakup of the applicable interest rate and the number of years before the regular rate is applicable again for the home loan.
Teaser loans can be a good way of reducing the home loan EMIs for the initial years, provided you understand that the EMI will increase after that.