Why A Home Loan Borrower Must Be A Patient Reader
For most of us, advertisement breaks are forced irritants we cannot avoid while watching our favourite programmes on television. However, once in while, you might like them, too. Advertisements involving life insurances, home loan and mutual funds, for instance, are particularly heart touching. The overwhelming emotions, however, subside as soon as you hear a voice declaring in a fast-forward mode — mutual fund investments are subject to market risk. Please read the offer document carefully before investing.
Yeah, well, there has to be a clause; what was the point of going all fruity about it, then, you think.
But, there is a great lesson to be learnt from this, especially if you are a home buyer who is planning to apply for a loan to fund the purchase — reading is the key, and any impatience carelessness shown in this regard could cost you dear in future. Someone investing in mutual funds will have a general idea about the market; someone investing in life insurance policies does not run the same risk as you do a home loan borrower.
The importance of reading is evident from the fact that that the Reserve Bank of India website on its Frequently Asked Questions (FAQ) page has dedicated a great amount of writing for this purpose.
“The loan agreement documentation runs into nearly 50 pages, and its language is complex. If you thought everyone signs the same agreements with the bank, and where is the need to read, you are not taking an informed decision. If you thought somebody would have pointed this to me if there was any problem, maybe they did but you could not read or listen to it,” reads the explainer at the outset.
If that is not inspiring enough for you to stress your eyes on reading the extra-small font only such official documents use in this day and age, there is another thought-provoking attempt. The text clearly points out that is works better for financial institutions if you did not pay much attention to reading.
"The home loan agreement may not be provided to you in advance so that this could be read and understood before you sign the agreement. Every method may be used to delay handing over a copy to the borrower in sufficient time."
The Central bank suggests you pay special attention to terms such as the reset clause, "incorporated by some banks in their home loan agreements that allows them to change the interest rate in the future, even on fixed rate loans". This would mean even if you have availed of your home loan on a fixed rate of interest for the entire tenure, your lender may reset rates after certain intervals in the name of “asset liability mismatch”. Another term to look out for is “exceptional circumstances”. Citing such a situation, your bank can unilaterally change lending rates.
If you did not read carefully you may also realise in future that the term "default" on EMI (equated monthly instalment) does not just mean non-payment of installments. It could also include divorce, death you’re your involvement in civil or criminal cases.
Under the agreement, your loan amount could also be disbursement directly to your developer's account. Do you think that is a good idea? What if the developer defaults on delivering the project and refuses to reimburse you? He already has your money.
There could be a clause in the loan agreement giving your bank the right to transfer your loan to a third party in future. You spent a lot of time researching about banks before you picked this one. Would you want your lender to take a unilateral call on transferring the loan amount to another party at a later stage?
And, did you know the agreement mandates you to inform your bank about your job switch "well in advance" without defining the time frame?
There could be cases where “issuance of pre-approval letter should not be construed as a commitment by the bank to grant the housing loan and processing fees is not refundable even if the home loan is not processed”.
All this should be inspiring enough to put some effort into being a patient reader before you sign a home loan document.