Mumbai, April 30: For those looking at buying a house, its another chance for a big saving. India’s largest bank, the State Bank of India, has extended its teaser home loan rate scheme by two more months. Under this scheme, borrowers get home loans at a cheaper rate for the first few years.
“The bank decided to extend the scheme, which was to expire today, since it is very popular with customers and because the bank’s liquidity is good,” a bank official told a news agency.
Other leading home finance companies are likely to respond in the coming weeks, to preserve market share. The consumer is likely to come out ahead.
Learn with DC
Q What are teaser rates?
They are special low rates offered by banks and housing loan companies for a limited period to borrowers. The interest rate is gradually increased to the market rate over a period of time. Major lenders such as SBI, ICICI and HDFC had earlier come out with teaser rate schemes on home loans.
Q Why is the RBI against teaser rates?
It feels that it will encourage people to take loans beyond their paying capacity as the interest rates are ramped up from the second year onwards. This could result in a pile of bad loans for banks
Under the current terms and conditions, SBI charges eight per cent on all home loans for the first year. For the next two years, the interest rate is nine per cent. This means that on a Rs 20 lakh loan with a life of 20 years, your monthly instalment will work out to about Rs 16,700 for the first year. For the second year, it will Rs 17,995.
SBI had come out with these teaser rates in 2009, and the scheme has proved popular with consumers. Almost all the major home finance lenders including ICICI Bank and HDFC now have teaser rate schemes — a move to preserve market share. In early April, all the major players had extended the teaser scheme till end April. While there are some minor differences amongst the schemes offered by various players in the market, the common feature is that the effective rate in the first year is 8-8.25 per cent. It was widely expected that the teaser rate schemes may go once the Reserve Bank starts to raise policy rates. However, given the large volume of cash in the financial system, that hasn’t happened.
The Reserve Bank of India has expressed unhappiness with teaser rates in the past. The RBI thinks especially low rates on home loans may encourage buyers with insufficient means to purchase properties. One of the reasons leading to the financial crisis in the US was the so called adjustable rate mortgage — similar to teaser rates in principle.
Rate guide
SBI home loan
1st year: 8%
2nd year: 9%
3rd year: 9%
Rest of Market
loan tenure: rate
* SBI’s scheme will continue till June 30.
* ICICI Bank has allowed its teaser rate scheme to expire on April 30.
* HDFC, whose scheme has expired on April 30, is yet to make an announcement if it will extend the special rates further.
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