Scrapping teaser loans may not impact affordability for home buyers, experts say
Moneylife Digital Team 27 April 2011

There is a feeling that replacing the very popular special loan scheme with floating rate schemes will not make much of a difference

Experts think that the move by the State Bank of India (SBI) to scrap teaser home loans will have no impact on prospective home buyers.

SBI, the country's largest lender, has finally fallen in line with the diktat of the Reserve Bank of India to discontinue teaser loans, and announced last week that it was replacing the special home loan scheme with floating interest rate schemes from 1 May 2011. Several other banks have already stopped the teaser loans scheme.

Some sector commentators think that discontinuation of this popular scheme would impact the decision of new home buyers, but there are others who believe that it will have little or no impact on customers.

"From the affordability angle, there will be no impact", says Mrunal Duggar, vice-president, residential services, Jones Lang LaSalle India. "The loans were misleading and lured customers into a false sense of security by offering lower interest rates for the initial years. Sensible buyers would not opt for such loans anyway, so it will not impact their purchase decisions."

The teaser scheme offered an interest rate of 8-8.5% during the first three years, after which, the borrower had to pay according to floating rates. The scheme did attract a large number of borrowers, which is probably also why SBI's former chairman OP Bhatt continued with it, despite misgivings by the RBI. The RBI said the scheme resembled the US sub-prime scheme which precipitated the financial crisis in 2008.

The discontinuation of the scheme would result in higher interest rates for customers, but that would level out over the long term. Ms Duggar says, "The teaser scheme would charge the borrower a higher rate after three years, which would come as a shock anyway. Home loan repayment being a long-term process, a concession during the initial years will not have helped customers anyway."

It has been reported that fewer people are opting for home loans recently, and preferring rented accommodation instead, on account of exorbitant property prices. This is indicated by sales and sales registration figures in Mumbai that have dropped since last year.

Despite an increase in the home loan limit in the Union Budget this year and various discounts offered by developers, buyers are staying away from making new purchases as prices have gone through the roof and beyond the budget of the average salaried people. In this situation, the discontinuation of the teaser loans is unlikely to make a noticeable impact.

The market also welcomed the announcement by SBI, as investors believed teaser home loans had an adverse impact on the bank's margins. Edelweiss noted that "the bank had continued with its special schemes, despite RBI's notification for higher provisioning, stating that special loans did not fall under the 'teaser' category."

Now, Pratip Chaudhuri, who took charge as chairman of SBI this month, says that the increase in deposit rates had forced the bank to take this decision.

Other home loan providers like HDFC and ICICI also provided teaser loans initially and later withdrew them. They will be relieved now, as SBI's decision will put them on a level playing field. Although SBI could still offer lower rates by doing away with the pre-payment penalty and discounting processing fees.

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