Did you read about an exciting new offer on a teaser home loan? On the surface, you may feel that its loan terms are better than your existing ones.
Teaser loans often create a buzz in the market because they come with plenty of promotional offers for the consumers. Some popular teaser loans include adjustable-rate mortgages, zero or low-fee credit cards, etc. Yes, teaser loans do look like an attractive option. And from a consumer’s perspective, they seem like a ‘good deal.’ But, if you are already repaying a housing loan, does it make sense for you to switch to a teaser loan?
Let’s find out.
What is a teaser home loan?
A ‘teaser loan’ is a special loan that lenders offer at a low rate of interest for the first few years of the loan tenure. After this period ends, you will have to bear the normal interest rates.
For example, suppose you’ve taken a home loan for 20 years at 9% interest. Now, the lender can offer you a teaser rate housing loan for 6%. This means that you will pay only 6% interest for the first three years of the loan. From the fourth year, your interest will change to 9%.
Remember, the rate of interest and low-interest duration will depend on several factors and vary from lender to lender.
Should you switch to a teaser rate housing loan?
You can switch to a teaser home loan if the switching cost is less than the savings from the lower EMI. To make the switch, you’ll have to bear the prepayment charges on the existing loan and pay a processing fee to avail of the new loan.
Most financial institutions will typically charge you 2-3% of the balance loan amount if you want to refinance. The processing fee also ranges from 0.5% to 1% of the new loan amount. Let’s look at an example to understand if a teaser rate home loan is worth it.
Suppose you’ve taken a home loan for Rs. 28.99 lakh for 15 years at 10.25% interest. You repay an EMI of Rs. 31,598 for the first four months. Since you began the repayment, the interest rate has now increased to 10. 5% Now, out of the total loan amount:
- You have repaid around Rs. 1,50,450
- The outstanding amount is Rs 27.49 lakh
At this point, you switch to a teaser loan for the rest of the tenure. Let us say this teaser loan charges 8.25% fixed interest for the first two years and floating interest after that. At 8.25% interest, Your EMI for the outstanding amount is Rs. 28,449. So, in the next two years, you will save:
Savings= (31598 – 28449) * 24 = Rs. 75,576
If the existing lender charges 3% as prepayment charges, you’ll have to pay approximately Rs. 82,500. Additionally, the processing fee for the new loan is 0.5% or Rs. 13,745. Let us calculate the cost of switching:
Cost of switching = (82500+13745) = Rs. 96,245
With this calculation, it is evident that the switching cost is more than the savings from the first two years with the lower EMI. So, in this case, switching to a teaser rate housing loan doesn’t make sense.
Things to know before switching to a teaser loan
- Make sure you know what interest rates will be applicable after the teaser rate ends.
- Before agreeing to the terms of the teaser loan, carefully read and understand the requirements, payment terms, and other important home loan details put forth by the lender.
- Financial institutions offer discounted interest rates for a teaser loan only for 1-3 years, following which floating rates will apply.
- Not all lenders offer teaser housing loans.
The bottom line
Just because financial institutions offer teaser loans doesn’t mean you should necessarily make a switch. However, the decision to switch to a teaser loan varies from individual to individual and depends on other home loan details like existing interest rates, monthly EMIs, your income, etc. If you are unhappy with your current loan terms but don’t want to go for teaser loans, you can opt for a home loan balance transfer instead, with a lender offering more attractive loan terms.
Want to buy a home of your own? Tata Capital’s home loan is the right fit for you! With affordable interest rates, flexible repayment options, and minimal documentation, you can apply for a loan online from the comfort of your home. Visit our website to learn more about our home loans, details of our repayment plans, and other loan offerings.