SBI Discontinues Teaser Home Loan Rates
State Bank of India (SBI) will discontinue its complex "teaser" home loan schemes by the end of April 2011. Starting May 1, the bank will offer home loans with floating interest rates comparable to those of other commercial banks and housing finance companies.
New Interest Rate Structure
- Loans up to Rs 30 lakh: 9.5% (1 percentage point above SBI's base rate)
- Loans between Rs 30 lakh and Rs 75 lakh: 9.75% (1.25 percentage points above SBI's base rate)
- Loans above Rs 75 lakh: 10.25% (1.75 percentage points above SBI's base rate)
These rates are subject to change in accordance with revisions to the bank's base rate, which are reviewed quarterly. This move comes after the Reserve Bank of India (RBI) urged banks to eliminate teaser loan rates due to concerns about their potential negative impact on asset quality.
Impact of RBI Directive
The RBI's directive was based on the belief that teaser loans, which initially offer lower interest rates but later reset to higher rates, could compromise the stability of a bank's home loan portfolio. SBI was the final prominent institution with these types of loans. The bank offered loans at 8-8.75% for the first three years with its SBI Easy Home Loan and SBI Advantage Home Loan products. After this introductory interval, rates would adjust to the prevailing floating rate structure.
Comparison of Old and New Rates
A 20-year loan of Rs 30 lakh at the previous teaser rate of 8.75% would amount to approximately Rs 884 per lakh. With the new rate of 9.5%, the equated monthly installment (EMI) is set to become Rs 932 per lakh.
Existing Teaser Loan Customers
Borrowers who currently hold SBI's teaser home loans and are still within the initial three-year period will continue to benefit from the original rates. The new rates will only impact fresh loan applicants. At least one housing finance company, LIC Housing Finance, however, still currently provides a fixed interest rate of 9.9-10% for the first five years on new loans and then existing rates are implemented.
Comparative Analysis
Calculations from apnaloan.com demonstrate that SBI possesses a favorable position, even after discontinuing its earlier scheme. The average rate on a 20-year SBI home loan stands at 9.5%, while a comparable loan with LIC Housing Finance would come to an average interest of 10.5% over the same period.
Additional Changes
SBI has also abolished foreclosure penalties on home loans. Previously, SBI borrowers were required to pay a 2% penalty on early loan repayments. Additionally, SBI now implements a graded processing fee structure, with the fees linked to respective loan amounts.