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Should You Apply for Teaser Home Loans That Come with a Fixed Interest Rate for Some Years?

Highlights

  • Is it worth applying for a teaser home loan where the interest rate will remain fixed for a couple of years?
  • Read this post which has answered the same using logic and examples

When getting the assurance that the rate of interest for a big-ticket home loan will remain fixed for a particular period, a lot of borrowers become joyous. When that fixed rate comes low, the joy only doubles. The fixed rate takes interest rate fluctuation out of the equation, which, otherwise, is the case with an out and out floating rate loan. But, if you read the above lines carefully, you’ll see the fixed rate will apply for a particular period. What will happen after that? No prizes for guessing, the rate will automatically convert into a floating one. That’s why these are called teaser home loans where the interest rate converts into a market-linked rate after remaining fixed for a particular period. Now the question arises, should you go for teaser home loans? The answer may not be a straightforward one as you may think of. So, you need to figure out the feasibility with a teaser home loan before taking a call on the same. The article will help you do so. Keep reading to know whether it’s worth applying for such a loan.

The Decision Should Rest Mostly on the Interest Rate Trends

Check the floating interest rate trends for the last couple of years to check the movement of the rate. When you check, you could find a spell of rate cuts or rise. But you also need to keep an eye on the science behind the rate cut and rise. That science is nothing but the economy of the country.

When the country goes through weak demand and inflation is under control, the central bank of that country gets the room to cut interest rates. The inflation has largely remained under control for the last two years. As a result, you could see the Reserve Bank of India (RBI), India’s central bank, cutting the repo rate constantly since 2019. The repo rate is the rate at which the central bank extends loans to commercial banks to meet their short-term obligations. The repo rate, which was 6.50% at the start of 2019, has now fallen to 4.40%. In percentage terms, the rate of fall has been more than 200 basis points i.e 2%. The exact fall has been 2.10% in 17 months.

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And, if you factor in the existing scenario where the lockdown has taken a toll on the finance of the salaried and other segments, the demand is not going to be buoyant in the next 6 months or so. This could create scope for further rate cuts, and if that happens, it will make banks slash their home loan rates further and make floating rates even more appealing.

Speaking of the current times where rates are likely to fall more than increase, having a teaser home loan where the fixed rates are higher than market rates by at least 2%-3% across loan amounts won’t make much sense.

Interest Rate Setting

One more thing you should know that the home loan interest rate includes a spread over the benchmark rate. If you talk about the benchmark rate, banks have started following the repo-linked lending rate benchmark to price floating rate home loans. The spread remains fixed throughout the loan tenure unless there’s a significant change to the credit profile of borrowers. In case you book a floating rate home loan today, you will get it at an interest rate lower than the teaser loan by at least 2%-3%. And with the rate cut scenario becoming all the more prominent, that 2%-3% gap could increase to 3%-4% over the next 1 year or so. Yes, you could find a lender like HDFC where the gap between the floating rate and teaser home loan is not more now. But even there, the floating rate could be lower than the teaser loan rate at least for a year, if not more, given the macroeconomic condition of India.

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Shall You Check Teaser Home Loan Interest Rates Charged by Lenders?

Putting the teaser home loan rate and comparing it with the floating rate will only lend credence to our support for a full-fledged floating rate system. Not all lenders provide a teaser loan, but some renowned names like HDFC Limited and LIC Housing Finance do so. Let’s check out the teaser and floating rates of lenders in the table below.

LendersInterest Rates (In Per Annum)Period for Which the Rate Will Remain FixedFloating Rates (In Per Annum)
HDFC Limited8.20%-9.15%2 Years6.95% - 8.00%
LIC Housing Finance (LIC HFL)11.80%-12.30%5 Years7.40% - 8.85%
PNB Housing Finance (PNB HFL)10.75%-12%Fixed rate option for 3, 5 and 10 years
The rate will apply for a loan amount upto INR 25 lakh
8.60% - 9.45%
Axis BankDepends on your income and repayment capacity2 Years7.75% - 8.55%

Will Your EMI Change When the Fixed Rate Loan Gets Converted into a Floating One?

No, the EMI will remain the same even when the fixed rate gives way to a floating rate. The difference is that the principal and interest repayment are not going to change with a fixed rate loan. But when it gets converted into a floating rate, the interest and principal portion will keep changing with the change in the interest rate. When the interest rate comes down, the EMI will constitute more principal and less interest and the other way round with the increase in the rate.

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  • Home Loan Interest Rates July 2020
    Axis Bank7.75% - 8.55%
    Bank of Baroda6.85% - 7.85%
    Citibank8.20%
    HDFC6.95% - 8.00%
    ICICI Bank7.45% - 8.55%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank7.40% - 9.70%
    LIC Housing7.40% - 8.85%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance8.60% - 9.45%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI6.95% - 7.60%
    Tata Capital9.20% - 9.35%