Party seems to be over for customers seeking teaser home loans as the country’s second largest bank ICICI Bank and the largest mortgage lender HDFC announced on Wednesday to discontinue teaser home loan schemes.
Last week Corporation Bank had also announced to withdraw the teaser loan scheme.
“ICICI Bank has withdrawn special housing loan scheme with immediate effect,” said official spokesperson of ICICI Bank.
Teaser rate is a special loan scheme under which a concessional rate is offered for a limited period to attract customers.
Under the scheme, home loan seekers had to pay 8.5% in the first year, 9.5% in the second year and floating rate for the rest of the term.
HDFC has also decided not to extend special housing loan scheme. “The scheme was supposed to end on November 30 and HDFC has decided not to extend it further,” said the official spokesperson of HDFC.
Under this offer, HDFC offered home loans at a fixed rate of 8.5% up to March 31, 2011, 9.25% for a period between April 1, 2011 and March 31, 2012 and the applicable floating rate for the balance term.
Both entities did not give clear reasons for discontinuing the scheme, but it was the pressure from the Reserve Bank of India, which forced them to take the step.
In its previous policy review meeting, RBI had voiced concern over the high risk of default on loans offered at teaser rates and to discourage banks from offering such schemes, it had increased provisioning for teaser loans to 2% from 0.4%.
State Bank of India was the first bank to introduce teaser loan scheme two years ago when the credit offtake was poor and cost of funds was also low.
Experts are not comfortable with idea of teaser loans and consider it an aspect of subprime lending, as they are usually offered to low-income home buyers.
When these borrowers try to refinance the loan before the rate increases, most will not qualify for standard mortgages. This leaves borrowers with increased monthly payments, which most can ill afford.