Remember, the devil lies in the detail
When you take a home loan from the bank, you enter into a home loan agreement and are bound by it. Quite often, enthusiastic sales persons from the bank would tell you that the home loan agreement is a routine document so you can just sign it. Don’t listen to them. As the borrower, it is your job to go through the loan agreement clauses one by one and also consult your financial advisor or chartered accountant about implications.
There are clauses pertaining to additional charges, prepayment charges, penal interest, frequency of resets in case of variable rate loans etc. In addition, there are also clauses about what happens if you delay or default on an EMI. The idea of reading the fine print of the loan agreement document is to ensure you are protected. Take your time and read through the home loan terms and conditions, before signing on the dotted line.
Role of the home loan agreement
This is the most important document that governs how your interaction with the bank will happen. Here are some key points for you to understand.
- home loan agreement is the constitution and governs the terms and conditions or rules and regulations of a home loan.
- The terms and condition cover items like what happens if you default on EMIs, penalties in case of bounced cheques / ECS payments, payment delays etc.
- The loan comes into effect after the borrower signs off on the document and the loan will only be disbursed after the agreement is signed by the borrower.
- The home loan agreement comprises all the terms and conditions that will govern the operation and servicing of your loan to the bank.
Important clauses in the home loan agreement
When you read the home loan agreement document, there are certain clauses you must familiarize yourself with; also known as the home loan terms and conditions.
- Home equity security clause stipulates that the value of the property with stipulated haircuts must be more than sufficient to cover the outstanding home loan. If the property value falls sharply, the bank can call upon you to offer additional security or pay down part of your loan. This clause has longer term implications for your financials and liquidity too.
- The second clause is about Acts of God, or the Force Majeure clause. Agreement covers normal and routine circumstances and not exceptional black swan conditions. That is where force majeure clause comes in. It shows then the bank can go against the terms agreed. For example, if the bank has given you home loan interest at fixed rate of 8% and if rates in the market have spiked to 13%, the bank will have a force majeure clause in the contract to reset rates higher.
- There is the adjustment clause, which gives the lender special rights under certain conditions. For instance, if your home loan is overdue, then the bank can fall back upon your existing bank account or FD with the bank to make good the debit. Secondly, banks also have a clause that in case there are dues like legal charges, penal interest etc, your EMI amount would first be used to fill this gap. Penal interest can get compounded each month, unless you take a statement and close out the dues.
- One of the most important clauses is the one that allows you to prepay the loan and the costs it entails. Banks are not allowed to charge a penalty for prepayment on variable home loans as per RBI regulations. But, there are 2 exceptions. Firstly, banks can stipulate a minimum lock-in period, during which the prepayment charges are levied. Secondly, in case of fixed rate loans, prepayment charge can be levied by the bank. This is evident only if you read the fine print.
The fine print may be painful to go through, but it is in your own interest to read it thoroughly.
Clauses you must know in event of default
Despite your best intentions, your home loan can go out of control. There are 2 clauses you must be familiar in this case. First is the notification clause, which stipulates that the onus is on the borrower to inform the lender about any change in employment status, profession, business, income levels etc.
The second clause pertains to how default is defined. This covers when the bank will send the notice to the borrower, when the notice will be pasted and when the home goes for auction. This is a situation best avoided, but it would be good to know the clauses. For that, the only way is to read the loan agreement document thoroughly and familiarize yourself with the home loan terms and conditions.