It is very important for a borrower to understand the meaning of teaser loans before taking up a home loan. Teaser loans are home loan offered to attract new home loan borrowers. The loans offer low fixed interest rates for the first two years of the tenure and from the third year the interest rates will go high they will change to fixed or floating interest rate, which will be based on the prevailing market rates.
The teaser loan might seem attractive to the borrower in the initial stage but as the interest rates become higher after two years the higher interest rates might become a burden to the borrower.
The Reserve bank of India has raised its anxiety over the teaser loans being offered to the home loan customers as it can cause pressure to the borrowers as well as the banks. RBI has recently increased the teaser loan standard asset provisioning to 2 percent from 0.4 percent, and has limited the home loan limit to 80 percent of the value of a property.
Teaser loan do not offer clarity to the borrowers, on the succeeding interest rates during the initial tenure, it is only after the two years the actual reference rates are given. There should be more transparency and prudence from lenders offering such loan.