A home loan agreement is a document that legally binds the borrower and the lender with its terms and conditions. Once a home loan borrower and a lender sign the agreement, they must abide by it. Once you have signed the home loan agreement, it isn’t easy to back out. So, it’s always good to take your time and read the home loan agreement carefully. Let’s look at some important clauses of the home loan agreement that you must read before you sign it.
Interest reset clause
With home loans taken from banks, floating interest rates are currently linked to an external benchmark such as the repo rate. Whenever there is an increase or decrease in the benchmark rate, the linked lending rate is reset accordingly. The reset frequency will be once in three months. It may, however, vary from bank to bank, and its details are mentioned in the loan agreement. Some banks immediately reset their interest rate with a change in the benchmark rate, while others reset monthly or every three months.
“Depending on the type of lender, the manner in which the interest can change and consequently alter your EMI is different. In the case of banks, check the frequency at which the interest rate can change and whether there will be a separate intimation to you for the same,” says Soumee Bhatt, general counsel for Bankbazaar.com. “For HFCs, it may be linked to the ‘interest spread’. For example, if the HFC increases its internal RPLR, your EMI will go up automatically. However, your EMI may not reduce automatically as the HFC will offer ‘lesser interest spread’ without reducing the RPLR. You have to approach the HFC to buy a lower interest spread by paying conversion fees.”
Banks levy no prepayment or foreclosure charges on home loans running on the floating interest rate. However, if you have taken a fixed-rate loan, the bank may charge a fee as per the rate mentioned in the agreement. Reading this clause can help you make the right repayment strategy.
LTV margin (Security clause)
The bank allows a home loan up to a certain percentage of the property’s value based on the income, credit score, age, and repayment capacity of the borrower. This is also called the loan to value (LTV). In the agreement, the lender may include a clause that stipulates that if the value of the underlying property falls during the loan period, resulting in an increase in the LTV ratio, the lender may ask the borrower to deposit the requisite funds to reinstate the original LTV ratio.
Amendment to loan agreement
Any amendment to a loan agreement is not possible once it’s been signed by both parties. To make an amendment, it’s necessary that both parties mutually agree to an amendment. A one-sided amendment to a loan agreement is a breach of trust and makes the agreement void. Identify and avoid the points in the agreement that allow the lender to amend the agreement.
Normally, when the borrower does not repay the loan EMI on time, the bank marks them as a defaulter. However, there are other situations when the bank may consider a borrower a defaulter. Some default circumstances are the demise of the borrower and, divorce when there is a joint loan application by husband and wife. Read the agreement carefully to understand the different situations that may invoke the default clause.
What else should you know?
Some lenders may require you to inform them if there is a change in job or address, and there could be a penalty if you don’t do that. Go through such clauses carefully and understand them before signing on the dotted lines. Remember that there is no way back once the agreement is signed.
Clauses of concern
* Interest reset clause details the terms for interest rate change and at what frequency
* Security clause may require borrower to deposit additional funds if value of the property falls so as to reinstate LTV ratio
* Demise of the borrower or divorce of husband-wife joint borrowers can invoke the default clause payout