An insight into the era of teaser loans
By Joseph Samson
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Teaser loans have been making news since quite some time. After having almost evanished from the system, these special loan schemes have again made a comeback. Some say that these schemes are good deals while others call them to be ‘risky business.'

A teaser loan is an adjustable rate loan which offers the borrower relatively low interest rates during the initial years of the loan. The rate of interest then increases after a few years. These loans generally offer fixed interest rates in the initial years which later on convert to a floating one. Hence they are also called fixed cum floating interest rate loans.

These loans were introduced last year into the Indian market so as to boost up the demand for housing finance in the economy. The first entity to start off with these loans was banking major, State Bank of India with its Easy Home Loan. At that time when home loan rates were in the range of 8.5% to 11% based upon the tenor of the loan, SBI came up with its special loan scheme which called for 8% interest in the first year and 8.5% for the second and third years. The rate thereafter was a floating one depending on the prevailing floating rates.

These loans became a big hit in the banking segment and many other banks also slashed their loan rates heavily. HDFC Bank, ICICI Bank, Axis Bank and Canara Bank are only a few to name. Thus competition in the market rose to a great height.

Rise in cash reserve ratio by 75 basis points this year led most banks to bring an end to the season of teaser loans. RBI's strict policy rate maneuver first led banks to raise deposit rates and subsequently lending rates also rose as a realignment process.

But this time too SBI went ahead as a path changer and extended its teaser loan scheme till April 2010. The act was then termed as a gimmick by many bankers. But recently, home financing major, HDFC Bank has also joined the play. With ICICI Bank slashing rates soon after HDFC, it seems evident that the teasers are back again!!

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