A teaser loan is one where the lender offers a slightly lower rate in the initial years and then charges higher rates in later years. The brainchild of then State Bank of India (SBI) chairman OP Bhatt, this scheme was launched to spur demand and avoid any adverse effect of global financial crisis of 2008 on Indian economy and credit demand.

In 2009-10, SBI flagged off the scheme with interest rates that were fixed at 8% for the first year and 9% for the second and third year. From the fourth year onwards, the loan morphed into an ordinary floating rate loan. The teaser loan attracted many young and first time home buyers who had low monthly income but would be able to pay usual interest rates as the income rises in later years.

While the scheme attracted people to take home loans, it also made the banks vulnerable to more defaults, as people would not be able to cope up with the increased interest rate or opt for a different home loan after interest rates surged. Many banks withdrew their teaser loan schemes in 2011 after RBI increased the standard provisioning from 0.40% to 2%.

However, in 2017 State Bank of India and ICICI Bank relaunched similar schemes.

SBI introduced a hybrid loan product, which allowed customers to tie up a fixed-rate loan for the initial two years, after which it shall shift to the market rate. The bank said that customers would be able to avail of home loans up to ₹30 lac at a fixed rate of 8.55% for the first two years of the tenure of the loan, which would later be readjusted to a floating rate. For women, the home loan rate had been fixed at 8.5% for the first two years. As per media reports, SBI chairman Arundhati Bhattacharya defended the scheme saying it was not a teaser loan, as the bank does not dilute the assessment norms, including repayment capacity while giving the loan. Its aim is to pass on the benefit of reduction in cost of funds and give a push to credit demand.

Experts on the other hand are of the opinion that the SBI FlexiPay Home Loan is a version of teaser loan as the EMI will be increased/stepped-up after the moratorium period is over. Therefore, it is offered only to salaried individuals with an assumption of job stability and that the salary will increase during the moratorium period.

Advantages

• Teaser loans make home loans affordable for new borrowers as the interest rates are low initially.
• It serves as an advantage to borrowers, especially if there is likelihood for the rates to move up shortly.

Disadvantages

• One of the major concerns of the RBI is the EMI affordability once the rates are revised. With the shift in interest rates, the resultant EMI could end up being a burden to the borrower.
• Many banks do not follow stringent evaluation of the borrowers financial and repayment capacity. Such evaluation should ideally be done taking into account the borrowers repaying capacity at normal lending rates, at the time of initial loan appraisal. If not done properly, the borrower could end up finding the remaining EMIs a burden.
• Job stability and a regular increase in salary are two basic assumptions behind teaser loans, which can sometimes be difficult to achieve.