A word of caution while taking home loan
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 agreement and the fine prints…
In the euphoria to acquire that
dream house, various clauses in the loan agreement are often overlooked. However,
these clauses have a significant bearing on areas ranging from interest rates
to repayment schedules. Reading home loan agreements is generally viewed as a
sheer formality and one always tends to ignore points that the agreement
mentions. Moreover, the legal language used in the document often seems more
alien than human!
In any case, not reading a loan
agreement thoroughly can land you in a soup. Here are some clauses, which
should be searched for inside a loan agreement and be clarified with your HFC
(Housing Finance Company):
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 Clause: There may 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.
For e.g. A cut in banks’ prime lending rate is not automatically
translating into reduction of all PLR-linked loan rates. The reason being cited
is that the bank’s margins are under severe stress due to lending rate cuts.
They feel interest rates on some existing sub-PLR loans do not even cover their
cost of funds and any further fall in those sub-PLR loans will worsen the
matter. Therefore, some public sector banks have revised the existing loan
contracts in case of select sub-PLR borrowers, by using the ‘force majeure’
clause, meaning a ’situation beyond control’.
Defining a Fault: A ‘fault’ for a layman often means a non-payment of an EMI
during the loan tenure. However, your bank or HFC may have a different meaning
for this term. 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. Therefore, you must be clear what your lender means by
the term ‘fault’.
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 rate as well as fixed rate home loans are linked to
the Benchmark Prime Lending Rate of a bank or the HFC 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 HFCs 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 HFCs offer lower
rates to new customers but existing customers continue paying the higher
interest rates. Check with the bank or HFC regarding the details about such
clauses.
These clauses are overlooked by most
home loan borrowers and some of them eventually end up paying interest rates,
fees, or hidden charges completely out of the blue. It is imperative that you
have a thorough understanding of such clauses with your bank or HFC.
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