Teaser rates on home loans, where banks and housing finance companies (HFCs) charge lower rates of interest for the first few years to attract new customers, could well be on their way out. With the removal of prepayment penalty on home loans by banks, the Reserve Bank of India (RBI) has abolished the possibility of banks having differential floating home loan rates of interest for old and new customers.
Banks like State Bank of India (SBI) made the concept of teaser rates very popular, where, new borrowers would be charged a rate of 9-10 per cent for the first two-three years, following which, the then-prevailing floating rates of interest would apply. With an increasing interest rate scenario and aggressive competition in the sector, many other banks and HFCs followed suit, promising rates of 10.25-11.25 per cent for the first three years, when the prevailing floating rates were at above 13 per cent, in September last year.
The past seven-eight months had not seen any major bank or HFC offering teaser home loan rates, although, they were not legally barred from doing so. But now, with interest rates required to be uniform for old and the new customers alike, according to RBI’s regulations, the concept of poaching customers from other banks by offering lower rates for the first few years may not be possible, unless, banks offer their existing customers the same low rates of interest.
“This step by the regulators will make banks and housing finance companies focus on specialisation by offering better products than focusing only on financial reengineering. It will also make the customers look at the entire life of the loan rather than just evaluating the lender at the time of taking the loan. Housing loans are long-term loans, and therefore, after disbursement, servicing will become a crucial differentiator,” said the spokesperson at HDFC.
In fact, since October 2011, HFCs like HDFC, LIC Housing Finance and DHFL stopped charging prepayment penalty, following an order from the regulator, the National Housing Bank.
“Now that the prepayment penalty has been taken off, it is easier for customers now to move to another borrower at no extra cost. With interest rates set to fall from now on, banks cannot charge lower floating rates for new borrowers and retain the higher interest rates for old borrowers,” said Gopal Gusain, circle head, Punjab National Bank (PNB).
The removal of the prepayment penalty and foreclosure charges applies both to prepayment by the borrower from his own sources, as well as through loans from another bank or lender
“The impact of the removal of the prepayment charges on the balance sheet of banks would be negligible. It provides a fairer deal for the existing customer in terms of interest rates,” said Vaibhav Agarwal, banking analyst at Angel Broking.