Home Loans: What Banks Can And Cannot Do
When you apply for a home loan, especially if you are a first-time home buyer, you will have many questions in your mind on what banks can and cannot do. For example, will banks be able to claim your home and assets, if you default on your payment? Can banks arbitrarily raise interest rates? Can banks charge you when you switch from a fixed rate loan to a floating rate loan? There are certain thinks banks and financial institutions can and cannot do.
What are they?
- When banks lower the base rate, banks can still leave the home loan interest rates to existing home loan borrowers not change much by altering the spread. If the base rate, for example, falls from 9.7 per cent to 9.3 per cent, home loan interest rates need not fall by 40 basis points, if the spread is increased by 20 basis points. Spread is the difference between the interest rate charged to you and the base rate.
- You can switch to fixed or floating rate loan when interest rates fluctuate. But, banks are allowed to charge you a processing fee and other charges when you switch.
- Banks have the right to change the loan tenure period instead of changing the equated monthly instalment (EMI) when the interest rate falls.
- If you do not pay your EMI for more than 90 days, banks have the right to consider your home loan a non-performing asset. Your bank may ask you to repay the home loan amount in its entirety. But, this still does not mean that you have defaulted on your home loan payment. Banks can claim your assets only if you continuously default on the EMI payment.
- According to Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, banks can claim ownership of your assets and sell it, if you are a defaulter. But, banks rarely exercise this right because there prefer more acceptable ways to recover the loan amount.
- A bank is not entitled to the entire amount of money they earn from selling your house, even if they take possession of your home. The bank must pay you the gains from the sale proceeding, if it exceeds the money you owe the bank. But, if the money your bank earns from selling your home is lower than the money you owe the bank, you will be expected to pay the bank.
- Banks have the right to report the fact that you have defaulted on the home loan. Your credit history will suffer if the bank does so, and it will be more difficult to obtain a home loan.
- In many situations, when the bank wants to seize your assets, you may still be allowed to reason with the representative of the bank and avoid this from happening, by compensating the bank through a process which is more acceptable to you.