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.
Sameer Tiwari, a Pune based mechanical engineer, thought he had made a “prudent decision” by opting for a fixed rate EMI when he took his home loan five years ago from a reputed national bank.
Three years after the date of disbursement, Sameer received a letter, which said it was time for renewal of his loan and that the interest on his fixed Home Loan had been increased by 0.5 per cent. Though this did not mean a change in the actual EMI he paid, this would however reflect first on his loan tenure, which would be increased to accommodate the interest change. On checking with the bank, he learned that there was a clause in the agreement that said the fixed rate was only for a period of three years and not for the entire loan tenure!
This letter brought endless, sleepless nights to Sameer and his family now, they had to recalculate and replan all their income sources and planned expenses because the “fixed EMIs (Equated Monthly Instalments)” will increase!
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.
Additional Reading: Things To Do When Unable To Pay Your Home Loan
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.
dear sir
i feel bad about your bad experiance, i was about to opt bank loan, seeing your article, i stopped my proposal of taking bank loan
and postponed my house buying for an brief period thanks for sharing news
regards
durga prasad
I read the entire article .This article provides a good knowledge abt what all things to be taken care of while taking home loan.
So i guess People will look into all matters pertaining to home loan after the reading the article..
Thanx.
Regards,
Mejo Koshy.
well, prashanth,
i think you must be working in some bank or financial inst.i guess.
this is about that person who was not aware of certain clause & sentences written in the fine prints, so he encountered a big surprise.
the reason is the guy in front of your desk while discussing loan do not inform you of such things & he will only talk about the good features of that loan.
possibly as you have described that many people knows better then the front office guys but if we think abt. the people who do not knows this then i would consider it as a breach of trust between the borrower & the person who sell the loan as he is only interested in clutching borrowers to take loan by one or other tactics. & this is an important point which the sales guy must inform to the borrower.
practically no one wants to make loss but misguding the people by keeping incompetent staff at front desk one should not do business & earn profit.
(an example – if you visit any of the branch of ICICI bank in mumbai i am sure you will find half of the total staff & especially front desk are not capable of giving satisfactory answers to the customer's querry. try it.)
& the country's economy & progress is mainly based on the people..
regards,
prashant
Regarding the countrys progress, we still have to go a long long way. The above article should surely prove handy to many, to read out and understand the clauses and its terminology, which at times differs from one instiution to another. Its true that there are numerous clauses either hidden or put across the borrower in a way that one surely misinterprets it, leading to surprises after disbursement. Its the RBI's responsibility to make sure that all HFC's agreement fine prints should be in laymans language and all deals to be fair and transparent strictly. All HFC's should have competent staff to guide through each and every clause, the loan sanctioning officer should make sure that all clauses are discussed and made clear to the borrower before sanctioning any loan. A special customer grievance cell should be set up under the supervision of RBI, any HFC indulging in unfair practice should be dealt with serious penalties, also to keep a check on the HFC's recovery agents(goons) who in the past have compelled borrowers to the extreme.
Regards,
Rakesh
I think the best way to buy ur house is to wait save and buy with as little loan component as possible. I'd rather put all the money into some investments and let it grow till I have enough to make a bargain 100% downpayment on my own terms.
Do Goal setting like Buy a small house first (just to sell at better prices) then trade it for bigger till u get ur dream villa.
All the while investing the money u wud have put in emi.
Benefits:
1.) The House does not become a Liability.
2.) You pay a lot less for your house and if u negotiate right (with the weight of 100% DP) you get gr8 Bargains
3.) Your money earns for itself and may even earn more than the house
and top it with worry free living (of the emi and it not elapsing or how the bank dupes or interest rate fluctuates)
u can have a healthier longer life to enjoy the house.
I Believe it is possible
Pls Letme know investment pocket money can be invested, also rate of appretiation ,suppose i invest Rs one lakh, how muchi it gonna b in three yrs, Planning to buy a house possibly without a loan if u can post ur views on govind_forbes@rediffmail.com
Hi Munish, Please don't mind it but I personally think that with this kind of thinking you will never be able to purchase a house for yourself in your entire life, untill and unless you become a politician or a bureaucrat.
sorry missed the email so moderator if it is neccessary u can take it frm here
I have availed home loan from a Nationalised bank. Even though loan is sanctioned under fixed interest, in the sanction letter the clause 'linking the interest
rate with the Benchmarc PLR' is included. But I understand that in the loan agreement, it is stated as fixed rate. In Decmber 2008, the interest rate is suddenly
changed to floating without any notice. I had a very tough time. Even though, it has been changed to fixed as of now, there are chances to revising it again to floating rate after
some time, may be after a routine audit, says the manager-in-charge. Is there any solution for this?
What to do in these situation .I cant scrap my plan to buy a home .Which are the HFC instituition that are beneficial these days any suggestion ?
its a good information. but as every bank knows this and they are here to make business.
waht happens if u know that the bank from which u want a take a loan has these provisions in the documents. and if u chose other banks the rate of interest is higher or some paper formalities are very stringent.
so how in that case we take loans.for increasing the loan every bank act within 24 hrs, but if the rates are down then they won't act so fast and instead say that the management is reviewing to decrease the interest or in case the rate is decresed but it will not pass on to new customers.
that means we have to wait till the banks change these values?
do we have an option. Either you agree to the terms and condition to get the loan or you don't get the loan. In india there is very little legal or government bodies available for consumer help. In fact the so called political class make sure this never gets addressed properly. Even a simple thing as standardising the measurement of a property is still not in place, it varies from builder to builder such as carpet, build up, etc…and at time people even don't know what they paying for.
My point is , Even if you read the agreement Thoroughly you are not allowed to change the cluases.
No bank is offering the luxury to negotiate the terms and Rates.
So Banks are exploiting the Peoples money.
And we people dont have any other choice.
Dear Editor,
When I was opting for a Home Loan through an elderly gentleman (my loan agent), I asked him once, why and who would take loan from Govt Banks when its cheaper and much less troublesome to take loan from private banks, he had a smile on his face and deep mystry in his eyes. He said nothing but smiled and I didnt also care much.
However, three years down the line, I am now moving my loan from Private bank to a Govt bank and ready to take all the trouble that comes with it and I am glad to do that.
I only sincerely wish, that gentleman had given me some wisdom. But as they say, every one learns through experience and thats the best learning.
Cheers Everyone,
Amit
this is very good for initial borrower.
All the banks are day light robbers. We should consider all of this before considering this. Also one should consider pre payment charges.
All the banks are day light robbers. We should consider all of this before considering this. Also one should consider pre payment charges.
Some of the readers felt that they can save the entire amount required for purchase of flat/house than going for a Bank Loan. This is the suggestion I gave to my son when he wanted to buy a flat. When the flat rates were prevailing at Rs.25 lacs, I advised him to save at least 10 lakhs and go for Bank loan for 15 lacks. He has obeyed my advise. To my surprise, the same type of flat jumped to Rs.35 lacs by next year. He had to go for 25 lacs loan and 10 lacks personal savings. The lesson is it is better to go for a flat/house at the earliest than to wait for accumulation of savings. Since the increase in real estates rates are atleast 20%per year.
Hi
A really great article. very informative.
However, the real question to ask here is
" Even if you know about the certain clauses in the loan contract are loaded against you, can you get the bank to edit the terms in their STANDARD contract ? "
What option (other than refusing the loan and applying with another bank with same story) does an individual have ???
because when you are buying a house, where can you get the kind of money required ( 5 time the annual salary ) other than a housing loan ???
what are the rules to get the home in private bank .
On every pack of cigarettes there is a clause "SMOKING IS INJURIOUS TO HEALTH" but still people who want to smoke do smoke. So if you want to buy a flat / house today go ahead and do it because I don't think it is possible for people to save money and then by one .. like my friend above has said estate rates are going up …. so if you want to buy .. buy otherwise forget it… and remember HFC are not charity organisations … every business is there to make money….. All the clauses mentioned there are to take care of adverse situation .. so that they (the financial institution does not run into trouble) … I to have taken a home loan after reading all these clauses … but what can you do .. I could not arrange for money otherwise …. And if I delay the process of buying which i did for around 2 years .. .I found that the escalating cost of real estate dearer than the rates of banks .. Now I feel i should have taken a loan 2 years back I could have definitely save a few lakhs
After reading these articles i think that we can do nothing. We cannot live without buying a house. We cannot buy a house without home loan even if we have money because so much cash cannot be in white. We cannot negotiate terms with banks because they are also doing business for their maximum profit. There is no government machinery to listen to our grevance in a smooth manner.
So friends, just chill.
Just think to earn more and more if you are to survive in this jungle raj.
Sorry if i offended any one of you.
Thanks.
Manish
What if I am living in a rented flat paying Rs 20,000 as a rent , in that case too home loan should not be opted , as return from investments is not that much as property rate appreciation in Mumbai
Buy a home with as much downpayment as u can,as early as u can coz rates are increasing really fast. Take the remaining as loan but try and repay as and when u can. Recently the waiver of penalty for repayment and reduction of interest rates by paying a minimal processing fee has helped me pay back my dues.
Eg:I took a home loan of INR 18.5 lacs in '08 when int rates were 11.25%(floating). ROI dropped to 10% and I enjoyed this ROI for quite sometime. I had taken a loan for 15yrs only at that point of time. Suddenly in 2010-11, my interest rate went up as high as 12.75%. So after paying EMIs for almost 2-3yrs, my term shot up to almost 18-19yrs & I realised that my principle still was 17.25lacs & I had paid an interest amount of almost 6 lacs!
Luckily for me last yr the penalty for repayment was removed and I had the option to convert my ROI from 12.75 to 10.5% by paying a service fee of 0.5% (of remaining loan amt) + service charge. I immediately discontinued a ULIP plan(which was always in negative, bought almost 6 yrs back) + FDs matured + increased my EMI…all this effectively brought my principle down to 11 lacs and my term down to 5yrs (imagine from 19yrs!).
I purchased the property in '08 for almost 25lacs (total)…today the value is 40lacs…If I would have waited for the 'one fine day', im sure it never would have been possibly as the gap between what I have in hand and the cost of the property just keeps increasing.
Therefore, purchase at the right time, save wisely & repay…the only mantra to get ur dream home & get tension free soon! Also, one good piece of advise…make sure u have a Term cover in place(on the applicants) to make up for any unforseen calamities!