Home Loan Agreements – Clauses You Must Be Aware Of
Authored By Sahil Vora, Chairman & Founder, SILA
When you decide to acquire a home loan, you must sign a home loan agreement, which is a legally binding document that dictates the rights, rules and liabilities of homeowners. Since a home loan is a long-term investment that lasts 15-30 years, it’s essential to carefully go through the home loan agreement and understand its clauses.
Here are seven clauses that you should watch out for and grasp thoroughly to avoid any unpleasant surprises in the future:
- Definition of the default clause
When you default a loan, it means you haven’t paid the loan EMIs. However, the definition of default can be modified by the lender.
In some cases, lenders broaden the meaning of ‘default’ to also include non-payment of EMIs due to unforeseen circumstances such as the death of the borrower, divorce (in case of co-borrowers), or involvement in civil/criminal offenses, among others.
Make sure that you understand the definition of default set by your lender and only sign once it’s clear and specific.
- Interest fluctuation clause
While taking a home loan, you can either opt for a fixed interest rate or a floating interest rate loan. If you choose a floating interest rate, you must sign an ‘Interest Fluctuation Clause.’
The interest fluctuation clause allows the lender to increase or decrease the interest rates as per the MCLR (Marginal Cost of Funds based Lending Rate) guidelines, without requiring an authorization from the borrower. Before signing, guarantee that your lender will adhere to the MCLR guidelines.
- Security cover clause
When you purchase property, it is considered as security for the home loan. However, if market prices fall, then lenders often ask for additional security as collateral to cover for the outstanding loan amount. Be wary of such clauses when signing the home loan agreement.
- Reset clause
Fixed interest rates are also taken advantage of by lenders. Under the reset clause, banks are allowed to change even fixed rates of interests after 2-5 years if the market trend is on the rise.
Some other banks allow fixed interest rates only for a limited period and then revise the rates regardless of the market trends. Look out for such clauses in your home loan agreements before signing.
- Force majeure clause
Also known as the money market condition clause, the force majeure clause empowers banks to change fixed interest rates when faced with extraordinary circumstances or economic circumstances beyond their control.
Lenders can increase interest rates or even shift the fixed interest rate to a floating interest rate in the future to counter such circumstances. Carefully go through your home loan agreement for such to avoid any surprises in the future.
- Amendment clause
Amendment clauses are extremely precarious clauses that trick borrowers by giving the lender the authority to alter the terms of the home agreement without consulting the borrower.
If your home loan agreement includes an amendment clause, then you should consult your lender and a financial advisor so that you understand the details accurately. Always make sure that your written consent is required to alter any terms of the loan agreement.
- Notification clause
Notification clauses require you to inform your lender whenever there’s a change such as a pay raise, a new job, or moving to another city for work, among others.
Sometimes lenders include additional clauses that define the terms of notifications and penalties incurred whenever you fail to comply. Watch out for such clauses and make sure it’s something you agree upon before you sign the agreement.
Far from being a mere formality, a home loan agreement is quite powerful and will dictate the terms of your engagement with your lender for a considerable time. Instead of rushing into it, take some time to go through the terms of the agreement carefully.
Get clarifications wherever necessary from your lender and always negotiate to get the best terms possible. Seek professional legal counsel, if required, to get the best home loan deal.