A home loan is a long term commitment that is spread over a period of up to two decades which is a major portion one’s earning career. Therefore the borrower must read and understand all the clauses which are involved in the home loan agreement before signing it in order to avoid heart burns at a later stage. Most people feel that since the same agreement is applicable to all borrowers, the need for reading it carefully doesn’t arise. This may not be true always and the long document of about 50 pages must be scrutinizes in detail to remain on the safer side. Here are some of the important clauses that the loan applicant needs to study carefully before entering into the home loan agreement.
Reset Clause on Fixed Rates: due to the trend of rising interest rates many people opt for the fixed rate home loan instead of floating rates or teaser rate variants. However this does not imply that the rates will remain constant throughout the repayment tenure of the loan. The banks can alter the existing home loan interest rate depending on changes in the base rates as per the RBI guidelines. Thus if one avails a home loan at 10.75% today this may witness an upward revision at a subsequent stage depending on the prevailing market conditions. However the rates must also be reduced as and when the base rate is accordingly changed by RBI. The borrower must remain alert to this condition and question the HFC in case of rates not being revised downwards when the situation demands so.
The Force Majeure Clause: This is a clause that permits the bank or lending institution to alter the rates depending on the internal policies and external market conditions at a later stage. This implies that the so called fixed rate home loan is actually a semi fixed one. The customer while signing the agreement must be alert to this fact. The conditions that permit such a change are usually ambiguous in the agreement which is major disadvantage for the customer.
The Default Clause: There are various reasons for which a loan can be termed as to have been defaulted upon other than just non repayment of installments on time. Some of the other conditions when the loan is deemed to have been in default include:
- In case one of the borrowers dies or the co-borrowers are divorced.
- If any of the borrowers are involved in civil litigation or criminal proceedings against them.
- In case the borrowers fail to notify the lending institution about loss or change in profession well in advance. The term “well in advance” is quite ambiguous which the HFC may use to its advantage at a later stage.
Additional Security Cover: Despite the fact that a borrower has made regular payments of the EMI, in case of the property price reducing due to any reason the borrower must provide additional collateral security to made good the difference in valuation.
Direct Disbursement Clause: This clause allows the HFC to make direct payment to the developer which is against the basic principles of lending as the loan is on the name of the borrower who shall be liable for the repayment of the loan in time.
A better understanding of all these clauses will go a long way in ensuring that the rights of the borrower is protected at all times during the tenure of the home loan.