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Home Loan: Read the fine print first

There are several clauses in your home loan agreement,which you need to understand.

Written by Adhil Shetty |
December 17, 2011 3:19:34 am

A loan agreement is a ‘contract’ entered into by the borrower and the lender 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 print

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 the home loan agreement is generally viewed as a mere formality and one always tends to ignore important points in the agreement. Moreover,the legal language used in the document often seems quite forbidding.

In any case,not reading a loan agreement thoroughly can land you in a soup. Here are some clauses,which should be searched for in a loan agreement and should be clarified with your bank or HFC (Housing Finance Company):

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Reset Clause on Fixed Rates: Banks have introduced the reset clause in their fixed-rate home loan agreements so that they can raise 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 HFC. 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.

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 s/he 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 (BPLR) of a HFC or Base rate of a bank lending you. In the case of an HFC,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

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. Also,recently RBI has been stressing that old and new customers need to be provided the same interest rates,so if you find that your bank is not adhering to it,do bring it up for discussion.

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.

— The author is CEO,BankBazaar.com

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