Always be clear about the clauses and conditions laid down by your bank or housing finance company. If at all you skip this task then you may face a major problem during the entire tenure of your loan or may be even beyond that.
If you are planning to shop for a home loan then interest rate charged by the bank may be of prime importance for you before finalising the deal. However your loan agreement is equally important and therefore it is advisable to know the agreement detail before signing the loan agreement.
Home loan agreement is generally viewed as a sheer formality and one always tends to ignore points that the agreement mentions. Beware as this may lead you to a big snag. The loan agreement is a contract that mentions some legal clauses on a paper and normally one does not really understand what the clauses mean.
So here are some legal clauses that are generally present in a home loan agreement of any bank or housing finance companies (HFCs):
Reset clause on fixed rates
Banks have introduced the reset clause in their fixed home loan documents so that they can increase rates in case the market rates increases in the future date. This clause permits banks to review rates at the end of certain number of year and it come into effect at the time of increase in the interest rates.
Effectively, this makes the fixed rate loans equivalent to floating rate ones. This gives the banks an escape against interest rate increases but it is a disadvantage for the borrower who is mostly unaware about such content in her/his agreement.
So read your loan agreement carefully to avoid future hassles.
Force Majeure clause
There may be certain loopholes in your home loan agreement that allows the bank or home loan company to raise the fixed interest rate under exceptional circumstances. This all will be mentioned under the force majeure clause of your agreement.
However the differentiation between the 'exceptional circumstances' is always a tough task. But if you scrutinise your agreement then there are chances that you avoid semi-fixed rate loans that are often announced as fixed rate loans.
Defining a Fault
'Fault' for lay-persons often mean a non-payment of an EMI during the loan tenure. However the bank or housing finance companies have a different meaning for this term. The home loan agreement of some bank defines fault as a case when the borrower expires or if the borrower is divorced in case the loan is extended to more than a single person.
Default may also be referred to a situation when the borrower or any of the borrowers is or are involved in any civil litigation or criminal offence. Thus you must be clear what your lender means by the term fault.
Security cover at times of falling property rates
This states that that a bank is eligible to demand for additional security when the property prices fall. Even if you are loyal on your EMI payments, this point demands a security cover in addition to your loan amount and if a person fails to provide such a security then s/he may be declared a defaulter by the lender.
Under such a clause the bank normally mentions that it is entitled to declare all sums outstanding under the home loan (including the principal, interest, charges, expenses) to become due and payable immediately if the value of the property or any security kept by the borrower depreciates.
Illustration: Uttam Ghosh/Rediff.com