Banks are constantly trying to offer the most competitive rates on their lending services in the current financial landscape. For home buyers, this is a welcome opportunity to get the most beneficial home loan option possible. Anyone on the hunt for this excellent home loan rate may have heard of a ‘teaser loan’.
So what exactly is so unique about this offering?
A teaser loan is any loan that offers customers an impressively low-interest rate for a fixed initial period of the loan tenure. After this period, a higher interest rate is effective for the rest of the tenure.
Banks offer this proposition as a great incentive to attract borrowers for all kinds of loans, including personal loans, car loans, or home loans. The main goal is to get customers to avail of the loan at an attractive initial interest rate so that they are then willing to lock in the later increased interest rate.
For instance, if a homebuyer chooses to avail of a home loan with a 30-year tenure at an 8% interest rate, the bank can then offer this customer a teaser loan where they only have to pay 6% interest in the first three years. From the fourth year onwards the interest rate will switch back to 8%.
Adjustable-Rate Mortgages (ARM) are one of the most common teaser loans available. This home loan has a fixed interest rate for a short initial period after which the interest rate is applied to the outstanding balance. This is reset periodically, either at yearly or even monthly intervals.
The important thing for customers to understand here is that these teaser loans require a level of discretion and must be considered with the full context and not just the initial attractive offering. Asking questions and evaluating all the complexities of the loan will help to decide if the rates are really a good deal based on the customer’s specific needs and situation.
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