What are Teaser Loans As a home loan borrower it is very important to understand what is a teaser loan and what

are the implications in short term and long term. InvestmentYogi presents a guide to hel p you understand the details of teaser home loans. Teaser Home Loans - What do they Have in Store for a Borrower The Reserve Bank of India or RBI, recently raised concern over teaser home loans being offered to lure new home loan customers. In the current scenario of rate fluctuations and g lobal financial crisis, the implication of such loans, on borrowers as well as on banks, has cau sed worry to RBI. So what are these loans, and how could it affect you as a borrower? Read on to f ind out more. What is a Teaser Loan? As the very name suggests, Teaser Loans have been designed to tease, or attract a home loan borrower in seeking a new loan. These loans have a relatively low, fixed interes t rate in the initial 2 years, say around 8 to 8.5 percent. However from the third year onwards, the r ates revert to a higher fixed or floating interest rate, which would be subject to the then preva iling market rates. The Good and Bad of Teaser Loans Advantages: -With low rates of interest initially, teaser loans make home loans affordable f or new borrowers. -It serves as an advantage to borrowers, especially if there is likelihood for t he rates to move up shortly. Issues: -One of the major concerns of the RBI is the EMI affordability once the rates ar e revised. With the shift in interest rates, the resultant EMI could end up being a burden to the bo rrower, especially if it is much more than what was expected. -With banks following aggressive practices to lure new customers, borrowers are seldom made to understand the difference in the initial years EMI versus the EMI for the rest o f the loan tenure. Many lenders do not provide appropriate illustration of the interest regime, aft er the initial discounted period. -Many banks do not follow stringent and accurate evaluation of the borrowers fin ancial and repayment capacity. Such evaluation should be ideally done taking into account t he borrowers repaying capacity at normal lending rates, at the time of initial loan appraisal . If not done properly, the borrower could end up finding the remaining EMIs a burden. Use InvestmentYogis Home Loan EMI Calculator to figure out the what EMI will you be paying for a particular amount of loan. Also read How are EMIs Calculated. RBIs Concern Keeping the above points in context, the Reserve Bank of India has expressed its concern that in case the floating rates shoot up, borrowers could default in their EMI payments. Such EMI defaults are not a good sign for the borrower or for the asset books of the lending bank.

Therefore, RBI has recently increased the teaser loan standard asset provisionin g to 2 percent from 0.4 percent, and has capped the home loan limit at 80 percent of the value of a property. So what should you do as a borrower? Tips while opting for a Teaser Loan -Ask your bank to give you the average loan rate. Though this average loan rate is based on the current base rate of the bank, it could serve as an indicative rate to understan d the lenders reference rates, and do a comparative study between other lenders. -From July 1, 2010, all loans would be priced under the new Base Ratesystem of t he bank, instead of the earlier Prime Lending Rate. This system is transparent and has no arbitra riness to borrowers. Understand your lenders base rate system, as the interest rate after 2 years would be benchmarked according to this. -Work out your Home Loan affordability by analyzing your financials before loan disbursement. EMIs are subject to prevailing market conditions after the initial years. So ens ure you are able to factor in for times when the rates shoot up. Check for personal factors such as a salary rise or promotion. -Ask your lender about prepayment clauses. Check for the flexibility and penal i nterests for prepayment and balance transfers. The main issue arising in a teaser loan versus a regular home loan is that no cl arity is available to borrowers, on the subsequent interest rates after the initial fixed rate years. It is only after the initial tenure, that borrowers get the actual lenders reference rates and an und erstanding of the effective cost of the loan. With RBIs stringent move, we could probably hope for more transparency and prudence from lenders offering such loans.