Teaser rates return in new avatar as Puravankara bets on rate softening

MUMBAI: Teaser loans, frowned upon by the Reserve Bank of India, seem to have returned in a different form. Bangalore-based developer Puravankara is offering a scheme that means buyers pay just a 6.99 per cent interest rate on their mortgage in the first two years. The builder will pay the difference to the banks with which it has tied up for the scheme.

In the past, the central bank has been critical of home loan products with low interest rates in the initial years, so-called teaser rates, as it took the view that customers may not be able to afford repayments when they became costlier. State Bank of India, the country’s largest bank, had to withdraw such a product.

"In a dry market, this is a good strategy to acquire customers until the regulator gets alert," said a Mumbai-based developer who didn’t want to be quoted.

The company said its move was prompted by the expectation that rates would decline.

"We have taken a specific view that the interest rate would soften so we decided to give the interest rate rebate to customers," said Jackbastian Nazareth, group CEO, Puravankara. The affordability gap is too high for customers initially but after two years the income of the customer catches up, he said, adding, "This makes the EMI affordable."

The developer has launched the scheme for some buyers and is said to be attracting the interest of the non-resident Indian community.

HDFC chairman Deepak Parekh has previously cautioned home buyers to be wary of schemes in which builders offer to pay interest on the borrower’s loan for a specific period.

He warned that any delay in payment would reflect poorly on the borrower’s creditworthiness.

"Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower’s loan for a specified period," he said in HDFC’s FY13 report.