Taking a dig at teaser rate products HDFC chairman Deepak Parekh cautioned borrowers of its risk factors. Customers need to be cautious of "too-good-to-be-true" type of products, he said in the company's annual report addressed to shareholders.
"To my mind, teaser products, of any nature entail risks. Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower's loan for a specified period. Borrowers have to be cautious because in the event of a developer delaying payment, the credit bureau reports will reflect this in the borrower's records, thereby impacting his or her creditworthiness," he explained.
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There are two kind of teaser rate home loan products: one offered by lenders including banks and housing finance companies while builders too woo home buyers through teaser schemes. Parekh talked about the latter.
When lenders offer it, it is also called as dual rate home loan schemes wherein borrowers repay at a concessional fixed rate for initial few years.
According to the chairman of India's largest housing finance company, alert should be raised if schemes or products are detrimental to the system as a whole. Unhealthy business practices can infiltrate into the system due to the herd mentality instinct and business compulsions. However such breeding grounds must be nipped in the bud.
"Ultimately, developers need to recognise that in the long-run, it is to their advantage to allow a correction in prices which will help their cash flows," Parekh said.
This is how it works:
In the wake of rising pile of inventory and drying up sales, many builders are luring customers by committing to repay interest on home loans for 3-4 years till the project is commissioned. They will repay to lenders on behalf of customers who are required to make to only around 20 percent payment at the time of booking properties.
Problem arises when projects get delayed from the scheduled time while the lender starts disbursing further. Therefore, the entire onus of repayment be it interest or principal amount comes on customers.
For those who buy home for investment purpose, this is particularly worrisome situation. Many of them wish to exit their investment well before possesion.
Irrespective of anything if builders defaults in the committed interest payment, borrowers will end up spoiling their credit record.
Parekh for prudent growth in housing
"It is important to safeguard the housing finance market and ensure that it continues to grow in a prudent manner. Regulators need to be vigilant and have their ear to the ground. Customers must understand the risks entailed in the products they opt for and lenders should fulfil their obligations of responsible lending," he said.
In FY 2013 - a year that witnessed India's lowest GDP growth in a decade, the growth in individual home loans remained strong. The demand for home loans is immense given the acute shortage of housing.
"Being increasingly convinced that the worst is probably behind us, the future outlook for the housing finance sector is extremely promising," he said with a note of optimism.