New teaser home loans will benefit banks more than you

When the State Bank of India launched its so-called teaser loans - called teasers because they carried low fixed-rates in the initial one or two years, and adjusted upwards later - the Reserve Bank of India frowned. Banks, the central bank said, were not taking note of the risks involved. The loans ended when the previous Chairman OP Bhatt retired earlier this year.

Private sector banks sighed in relief, as the old teaser loans were taking market share away from them.

Last month, it was time for them to return the compliment. ICICI Bank brought back the teaser loan by offering fixed rates of 10.5-11.5 percent (depending on the size of the loan) for one year and 10.75-11.75 percent if you want your rates fixed for two years. After that, floating rates apply.

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[caption id=“attachment_77140” align=“alignleft” width=“380” caption=“While interest rates may not have peaked, the betting is that the Reserve Bank will pause rate hikes by the end of this year - which means rates will not go up after that. Photo by Vector Portal/Flickr”]  [/caption]

On Monday, HDFC went one better and offered three-year fixed rates in the range of 10.75-11.75 percent, and five-year ones in the range of 11.25-11.75 percent, depending on the size of the loan. The smaller the loan, the lower the fixed rate.

Should you be rushing to grab these loans, assuming you are buying a house - which fewer people seem to be doing in these days of bloated realty prices?

Hang on. The experts advice caution. This time the banks are teasing you for reasons that are right for them but may not be so for you.

Reason: when SBI started the teaser loan fad in 2008-09, the economy was about to move up again, and interest rates were ready to climb as inflation was on the comeback trail. In short, you would have been protected by a fixed-rate loan.

Now, the situation is quite the reverse. While interest rates may not have peaked, the betting is that the Reserve Bank will pause rate hikes by the end of this year - which means rates will not go up after that. With growth slowing and inflation easing, it makes no sense to worsen the economic climate by raising rates further.

In this scenario, the chances are that interest rates will start falling somewhere from mid-2012. Since home loans are long-term in nature, you will benefit by opting for floating rates since that will benefit you a year or two down the line.

Not just that. You will also benefit immediately. The new dual rate fixed-rate loans are actually higher for larger loans.

In HDFC’s case, for example, floating rate loans vary from 10.75 percent to 11.5 percent - which means it is cheaper at the top end for larger loans above Rs 75 lakh. For smaller loans below Rs 75 lakh, there is no major change.

However, a choice between accepting teasers and floaters depends on you finally. If you are comfortable with the predictability of rates, the new dual-rate loans are for you. You obviously don’t mind paying a small premium for the security of a predictable EMI for three to five years.

But if you are the kind that would like to take a bet on lower rates from next year, the new teasers are not for you.

For the banks, though, the proposition is win-win. Whichever one you opt for, they gain. The teasers get them higher earnings upfront, in exchange for possibly slimmer margins if interest rates don’t fall as predicted. But if they do, they gain even more.

Banks will be banks. They have their own best interests at heart.