Clauses That You Should Be Aware Of When Opting For A Home Loan
Banks in India have the authority to demand additional security when property prices fall in the real estate market. Even if you pay your equated monthly instalments (EMI) regularly, this clause demands a security cover in addition to your loan amount. If a borrower fails to provide such a security then they might be declared a defaulter by the lender.
Sameer Tiwari, a Pune based mechanical engineer, opted for a fixed rate EMI when he took his home loan five years ago, from a reputed national bank.
Three years after the date of disbursement, Tiwari received a letter, which said it was time for renewal of his loan and that the interest on his fixed home loan had been increased by 0.5 per cent. Though this did not mean a change in the actual EMI he paid, this would, however, increase the loan tenure to accommodate the interest change. On checking with the bank, he learned that there was a clause in the agreement that said, the fixed rate was only for a period of three years and not for the entire loan tenure.
This letter made Tiwari to recalculate and replan all his income sources and planned expenses because his fixed EMIs were to rise.
What is a loan agreement?
A loan agreement is a 'contract' entered into between the borrower and the lender (banks and financial institutions) that regulates the terms of a loan. The loan agreement comes into picture immediately after the bank appraises your credit and the property that you have identified.
The fine prints
Reading home loan agreements is important to know the clauses mentioned in it. To understand the legal language one can always get in touch with their legal consultant or even nowadays get in touch with online consultants.
Here are some clauses, which you would find in a loan agreement and be clarified with your finance institution:
Reset clause on fixed rates: Banks have introduced the reset clause in their fixed rate, home loan agreements so that they can increase interest rates in case the market rates increase in future. This effectively makes fixed rate loans equivalent to floating rate ones. This gives the banks an escape from interest rate surges but is a disadvantage for the borrower who is mostly unaware about such content in their agreement. Typically, the period for such reset clause varies from two to five years depending on the bank or housing finance company you borrow from. So read this clause in your loan agreement carefully.
Force majeure: There might be certain loopholes in your home loan agreement that allows the bank or home loan company to unfix and raise the fixed interest rate under exceptional circumstances. This will be mentioned under the 'force majeure' clause of your agreement. However, the differentiation between 'exceptional circumstances' and normal circumstances is always a tough task.
Defining a fault: A 'fault' for a layman often means a non-payment of an EMI during the loan tenure. However, banks might have a different version. The home loan agreement of few banks defines fault as a case when the borrower expires, the borrower is divorced (in case of more than a single borrower), or the borrower is/are involved in any civil litigation or criminal offence.
Security cover at times of falling property rates: This clause states that a bank is eligible to demand additional security when property prices fall. Even if you are loyal on your EMI payments, this clause demands a security cover in addition to your loan amount and if a borrower fails to provide such a security then he/ she may be declared a defaulter by the lender.
Floating is fixed and vice versa: Floating as well as fixed rate home loans are linked to the Benchmark Prime Lending Rate (BPLR) of a bank or the financing company from which you take a home loan. Hence, if the BPLR is 13.5 per cent and floating rate home loans are at a discount of 1.5 per cent to the BPLR, then the interest rate on a floating rate home loan is 12 per cent. So, whenever the BPLR is raised, then the interest to be paid on the floating rate home loan goes up. The vice versa, also, holds true.
However, banks and financing companies do not show the same alacrity to reduce the interest rates, which they might have shown when increasing it. When interest rates come down, banks and financing companies offer lower rates to new customers but existing customers continue paying the higher interest rates. Check with the bank or financing company regarding the details about such clauses.