Teaser loans have interest rate that is 1-2% lower than the prevailing interest rates in the market and that low interest rate is offered for specific time period, say 1 to 2 years. After the honeymoon period (initial years where they have to pay low rate of interest) the borrower needs to move to floating interest rate existing at the specified time. In India, teaser home loans were introduced in January 2009. The initiative which was first introduced by State bank of India (SBI) was soon followed by other banks. In the present scenario where interest rates are supposed to increase in near future, home loan borrowers found the concept of teaser loans very attractive as they would have to pay low interest in the initial phase, but they seemed to ignore the fact that after completion of the honeymoon period, when the borrowers will start repayment at the floating rate, the shift in the EMI will be huge, resulting in disruption in their financial planning. The same results in increased default payments affecting the asset quality and profitability of the banks.
During last few months, RBI has expressed discomfort with banks who are lending home loans at teaser rates. In its second quarter review of monetary policy the limit for asset provision in the case of teaser home loans was raised from 0.4% to 2%. This will restrict the ability of banks to offer loans at lower interest rates in initial years. RBI was also concerned that borrowers were not intimated properly about how floating rates are estimated and what will be the implication of teaser rate after the initial low interest period. RBI also pointed out that the banks have been ignoring the repayment capacity of the borrowers while offering home loan rates. RBI also expressed concern about the fact that normal home loan borrowers are not savvy to estimate the impact of increased home loan rates after few years, and might default once the rates start rising.
At the end of the reverse mortgage loan the total amount owed to the lender is the total amount of cash received by you, in the form of either a lump sum or as monthly payments, plus the total interest which has accrued on the loan. The Federal Housing Authority in the USA specifies the maximum amount which can be loaned to you by the HECM lender. This amount depends on the present value of the home, what current interest rates are and also on the age of the homeowner who will receive the proceeds.
Housing development and finance corporation (HDFC) has extended the scheme four times from December 2009. HDFC Chairman Mr. Deepak Parekh said that lenders of teaser loans should withdraw the scheme as RBI is quite unhappy with the product because customers are not able to realise the implication of teaser loans after the honeymoon period. HDFC has extended its teaser home loan scheme in October where borrower will pay 8.5 in first year (April 2011) and 9.5 in second year (April 2012). These rates were revised from previous rates of 8.25% and 9% for first year and second year respectively. The move was taken with the fear of losing their market share to the rival banks. Now, HDFC is not in favour of extending this scheme taking into consideration the additional asset provisioning mandated by RBI.
The only way to be confident in your decision is to know the good, the bad, and the ugly. For example, did you know? * Instead of helping a senior homeowner afford to stay in their home, a reverse mortgage can trap them in their home. * Lenders steer a majority of seniors into a fixed-rate when an adjustable rate is better suited to meet their needs. * Family members can be left with a terrible burden that can cause them great emotional anguish and financial distress. * A borrower can become a target of scams and fraudulent activities.
The demand for residential loans has been rising since last few months and is expected to grow because of the upcoming affordable housing projects by many of the real estate developers. According to one of the rating agencies in India, it is estimated that from the total bank’s home loan portfolio of approx 3.4 trillion in September 2010, 20-25% was linked to teaser loans rates.
Find a financial advisor and elder law attorney who is knowledgeable and has no stake in your getting one. Have them go through the disadvantages and advantages. Attend the counseling that is mandatory to make application. The counselor has no connection to the lender and should be able to provide you unbiased information.
Teaser home loans have led to an increase in the demand for residential property among other things due to incentive of paying lower interest rate for initial years supported with low cost housing offered by many developers. In December 2008, SBI was able to improve its market share of home loans by approx 18% with the help of teaser loan scheme. However, the decision of RBI to hike key policy rate, and increase standard asset provisioning have made it difficult for the banks to continue the offer of teaser home loan schemes. This is likely to impact the demand for housing and put downward pressure on the real estate stocks. The latest loan-for-bribe scandal will also impact the real estate sector, as the banks are likely to toughen the terms of loans for real estate companies squeezing the liquidity in the market
Harris Smith offers advice on home equity line of credit and obtaining credit