Govt worried over teaser loan rates

Teaser home loan rates, which entice borrowers with a low fixed rate initially and then move to a floating rate, are a matter regulatory concern and may impact financial stability of the lenders, Parliament was informed on Friday.

"...Borrowers with low financial means may get attracted to take such loans on finding the initial low interest rates to be within their financial means, but may land themselves into a financial distress should interest rates start rising and the banks start charging them with higher interest rates post the lapse of the initial period," Minister of state for Finance Namo Narain Meena told the Lok Sabha in a written reply.

The resulting delinquency of such loans would have adverse impact on the financial stability of the lending banks, he said.

"Offer of such interest rates are a matter of regulatory concern...," Meena said. Meena's reply in Parliament came at a time when some banks are either relaunching teaser rates or extending the period of previously introduced rates.
ICICI Bank has re-launched the teaser rate for home loans.

"Mortgages continue to be a focus area for ICICI Bank. We offer competitive rates in the market and currently the rates are 8.25 per cent for the first year, 9 per cent for the second year and existing floating rate thereafter," said a spokesperson of ICICI Bank.

The scheme, re-launched by ICICI Bank will continue till April end, the spokesperson said. ICICI's teaser plan, which offered home loans at 8.25 per cent for 2 years and existing floating rate thereafter, was discontinued from March 1, 2010.

The two other major financial institutions which are offering teaser rates are State Bank of India and HDFC.

Last month, State Bank of India extended its 8 per cent special home loan scheme till April 30. Under the SBI scheme, a home loan borrower will be required to pay 8 per cent in the first year and 9 per cent in the second and the third year of the loan period.

The State Bank had initially launched these products in August last year for a limited period of three months, but later extended it till March 31, 2010, and then again till April end.

Besides, HDFC re-introduced teaser rate last week. Under the scheme, borrowers can avail loans at 8.25 per cent till the end of the current financial year and 9 per cent till March 31, 2012.

This is marginally higher than the previous scheme where HDFC had offered customers an interest rate of 8.25 per cent till March 31, 2012.