Teaser Rate

Loans & Credit

A teaser rate is an artificially low initial interest rate on a loan for a limited period (typically 1-3 years), after which the rate resets to the market rate. Banks use teaser rates to attract borrowers, but the long-term cost is often higher than a standard floating rate loan.

In detail

Teaser rate trap:nYear 1-2: Teaser rate 7.5% (seems great vs market 9%)nYear 3 onwards: Resets to RLLR + 2.5% = 10.5% (may be higher than market rate)nnRBI has expressed concern about teaser rates. SBI's "special" home loan schemes sometimes offer teaser structures.nnCompare total interest cost: calculate total interest outgo over 20 years for teaser vs regular rate. Teaser looks attractive short-term but can cost more long-term if spread after reset is higher than comparable floating rate.

Formula

Compare: Total EMI outgo for teaser vs standard floating over 20 yearsn(Factor in rate reset and likely rate trajectory)

Real-life example

🇮🇳 India example

Bank offers: 7.5% for Year 1, 8.5% Year 2, then market rate (currently 9.5% but floating). Vs a standard floating rate home loan at 9.1%. In Year 1-2: teaser saves Rs 8,000-10,000/month. From Year 3: teaser is at market or above. Over 20 years: difference is small. Choose based on current cash flow need, not just Year 1 rate.