17 FEBRUARY, 2022

When you avail a home loan, you need to sign the loan agreement before you hand it over to the lender as your acceptance. The home loan agreement includes various terms and conditions that can affect your loan and its repayment. One such significant clause in your home loan agreement is the reset clause, which you should know about.

 

If you are about to avail a home loan, it would be best to know about the reset clause present in the home loan agreement.

 

What is the reset clause of the home loan agreement?

The reset clause is a section in the home loan agreement, which states that your interest rates will be ‘reset’ or readjusted after a particular period. Typically, the reset period is after 2-4 years of your tenure. It is usually for fixed or mixed interest home loans where the clause states that the interest rate would be converted to floating interest rate and will be charged at the prevalent market rates. With this reset clause, the fixed interest rate home loans are converted to floating interest rate home loans after the predetermined period.

 

Why is it added?

Fixed interest rates do not change despite any change in the market rates. Therefore, while you opt for a floating interest rate home loan, you are safe from any market upheaval or changes in the market rates. But this can be detrimental for lenders. Therefore, the reset clause is added in the home loan agreement as it safeguards the lenders from losses in the event of an increase in the interest rates. The reset clause allows the lenders to change the home loan interest rates after a few years to equate it with the prevailing market rates. 

 

How can the reset clause affect you?

Due to this reset clause, the lender can increase your interest rate according to the increase in the market rates. Moreover, as it is applicable in fixed interest home loans or mixed interest home loans, the presence of a reset clause can affect your choice of interest rates.

 

What can you do?

While it is crucial to read the fine prints carefully to understand all the aspects of the loan agreement, you must review the reset clause closely.

  • You must consider the period after which the reset clause would be applicable.
  • Carefully study the rates and charges of mixed rate home loans and compare them with floating-rate loans while choosing the interest rate type.
  • While choosing the mixed interest rate/fixed interest rate (with reset clause), you must be prepared for changes in the interest outgo as per the reset period.
  • You must also know that this reset clause can be applied to selected borrowers depending on their tenure or loan amount.

 

 

The lenders are required to furnish all the relevant information about the loan like rates and charges, late penalty, interest rates conversion charges, etc. Hence, the loan agreement is a detailed document that contains all the relevant details about the loan. Therefore, before you sign the loan agreement, ensure that you read all the aspects carefully and get clarification from the lender in case of any doubts.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.