The clause known as the Force Majeure Clause states that “Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement” Usually there is a time frame, from which Banks can enforce the changed rate of interest and this time frame could be anywhere between 2-5 years. Banks protect their interests in the lending process, so as to create conditions that will help them stabilize themselves in times of crisis and they do put this in effect and revise the rates from time to time.
The general understanding is that fixed home loans are fixed in nature and do not alter in any manner throughout the the tenure of the loan. This is not strictly the case and is restricted to certain conditional environments. Banks have the right to change this interest rate if conditions in the market change dramatically or if the the internal policies of the bank change. Hence, one cannot arrive at a conclusion that fixed interest rates will remain fixed for the entire loan tenure of the loan applicant.
Time and again stress is laid on reading the fine print in any money or legal transaction and this fact is explicitly stated in the home purchase loan agreement document that is provided by banks and financial institutions.
The clause known as the Force Majeure Clause states that “Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement” Usually there is a time frame, from which Banks can enforce the changed rate of interest and this time frame could be anywhere between 2-5 years. Banks protect their interests in the lending process, so as to create conditions that will help them stabilize themselves in times of crisis and they do put this in effect and revise the rates from time to time.
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 could be 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’.
The learning for the loan seeker here is then to weigh the pros and cons of fixed interest rate home loans vs. Floating rate home loans. Come to think of it, this clause really changes the equation.