How good is a `Teaser Home Loan` for you?

Adhil ShettyBankbazaar.comTeaser loans had created a buzz in the home loan market in India a few years ago. They were one of the most discussed loan schemes. Owing to critiques all round and a closer watch by RBI, many banks slowly withdrew advertisements of this product. Teaser loans are now back as ‘Part fixed loans’ or ‘Limited Term Fixed Loans’.Understanding part fixed loans (teaser loans)Part fixed loans are loans offered with a fixed rate for the initial few years, say 2-4 years and thereafter at a floating rate, according to the rates prevalent at that time. There are two types of part fixed loans. Under the first type, the entire loan can be locked at a particular fixed interest rate for the first few years, and then floating thereafter. In the second option, part of the loan can be locked up as fixed rate for the entire tenure of the loan and part as floating. Some teaser loans offer home loans at rates lower than market rates for a fixed duration. When should you opt for a part fixed loan? Opting for a part fixed loan is best suited in a rising interest rate scenario. When the interest rates are low, banks are usually reluctant to come out with part fixed home loan schemes. The biggest USP of this scheme is the offering of loans at a lower interest rate in a rising interest rate scenario, and thereby offering borrowers a chance to save money on the loan repayment. However, in the current scenario where rates have relatively softened, one can opt for part fixed loans in two situations:1) If you are unwilling or cannot afford even a slight variation of rates on the higher side2) If you are planning to pre-close the loan in 5-10 years time, and wanted to ensure the advantage of an unchanged lower rateIf you do not fall into any of the categories mentioned above, then part fixed loans are less likely to benefit you in the present scenario.Apart from these, if your bank is offering part fixed loans at lower interest rates than the current rates, then you may opt for this scheme.What you should know before opting for part fixed loansEssentially teaser loans in India have followed the model of US teaser home loans, attracting users with lower interest rates. The Reserve Bank of India has been actively monitoring all teaser loan plans to avoid any US subprime mortgage like crisis in India. Before opting for a part fixed home loan, read the fine print very carefully to understand all its implications. As a loan seeker, ask the bank for a year-wise breakup of the interest rate that would be applicable, and the number of years before the loan gets linked to the regular base rate.One of the biggest caveats in this scheme is the high likelihood of default. Since the rate of interest is lower for the initial few years as per the plan, many people are not able to adjust to the increased EMI when the loan is linked to the normal rate of interest after the initial period. So, keep a closer watch over the impending changes in EMI.Banks offering part fixed loansWith interest rates falling, teaser loan schemes may have to wait for the right moment to regain their popularity. Citibank, Standard Chartered Bank and HSBC Bank had introduced teaser loans last year by renaming them as semi fixed rate home loans, but have temporarily withdrawn the same due to the rate cuts initiated by the RBI. Currently, banks like ICICI and non banking finance companies like HDFC Ltd are offering this scheme. Some public sector banks are offering this scheme with special approval and not as a regular scheme. State Bank of India has requested RBI to permit lenders to offer rates below the base rate. If this is approved, teaser loans will be back in focus.For borrowers worried about EMIs draining a significant part of their disposable income, any bank offering loans at lower than prevailing interest rates comes as a great relief. Teaser loans are a good way to reduce your home loan EMIs for the first few years, provided you understand that your EMI would increase after that.