‘Teaser' offers

Teaser home loans are today the rage with first-time home buyers. Here's what you need to know about them.

How they work

Teaser home loans carry attractive interest rates and discount offers in the initial years of the loan's term. A novice loan applicant may be drawn to teaser loans because they start off with lower EMIs . However, the EMIs can rise sharply if interest rates rise during the tenure of the loan.

a. Interest rates on the loan are usually two or more percentage points lower than the prevailing ‘market' interest rate.

b. Such loans usually offer a fixed (discounted) rate for a few initial years (usually 1-5 years) with a clause that moves the loan to floating rates at the end of this period.

Evaluate a teaser loan by totalling loan repayments and costs based on processing fee, service charges and other charges, apart from the interest outflow in the initial phase of the loan tenure. However, only when the floating rates kick in, can one evaluate the total interest outgo on the loan.

Fees involved:

a) Processing Charge: It is a fee paid to the lender when you apply for a loan. It could either be a fixed amount or a percentage of the loan amount in the range of 0.5-2 per cent.

b) Pre-payment Penalty: When a loan is paid back before the end of the agreed duration, a penalty is charged which could be around 2 per cent (or even more in the case of a teaser offer) of the amount pre-paid.

c) Commitment Fee: Some institutions levy a commitment fee in case the loan is not availed within a stipulated period. d) Miscellaneous Costs: Some lenders may levy a documentation or consultant charge.

e) Registration charges of the mortgage deed.

Interest rate hike after teaser period

A key call that you take is what will the interest rate, and consequently your EMI be once the initial period ends.

Tracing a pattern in the bank's decisions to raise interest rates may help. The RBI also conducts surveys for the same . Read up as much as you can before you decide to take your teaser home loan.

Remember that once the teaser offer is over, you can also opt to switch your home loan to a different provider or bargain with your current loan provider for a better interest rate.

This is relevant to existing borrowers as well. Here again, the prepayment penalty can prove to be a minor irritant, if it's a bit steep. If the interest rate on the new loan is more than 2-3 per cent cheaper, it is worth the shift.

What to clarify from the bank

a. A charges list to understand when various charges like service charges and penalties are affected. b. Time lines/dates when the successive loan rates will kick in and if you will be notified. The interest reset clause on your loan agreement will clear these doubts

c. The option of switching to a new loan scheme offered by the bank or shifting the loan at any point during the loan tenure. Is there a switching charge and is it different from general loan offers? Read the prepayment penalty clause carefully for this

d. When will the actual transfer of ownership take place after the loan is repaid? Has it been clearly defined in the agreement when you will receive the property documents to claim ownership?

e. A copy of the amortisation table. This will show how you will repay your EMI. You will start by paying more of the interest outgo rather than the principal in the initial years. The reverse will be true towards the end of the loan tenure. So, when new interest rates kick in, it will be for the remainder of the loan amount, which will be a significant percentage of the loan. This is key because floating interest rates could be higher for higher loan amounts.