08 JULY, 2022

A home loan is one of the significant investments you make. Most people know about a home loan and how it can help them buy their dream home. However, they are not fully aware of the clauses written in their loan agreements. There are certain clauses that can be adverse for them and can cause huge losses. Therefore, it is important that as a borrower, you read the fine print of the agreement and get clarity on all the points before you sign the home loan paperwork.

Here are four important clauses in a home loan agreement that you must know about.

 

  • Default clause

If you default, you can be penalised and charged a late payment fee. The word default can be very ambiguous in a home loan agreement. Though it simply means not paying the Equated Monthly Instalment (EMI) on time or missing out on EMIs, lenders could have an extension to this meaning. Your lender could also mean that you commit default if you do not pay EMI during litigation, death of borrower or when divorcing co-applicant. It is best to know about the clause and ask the lender for clarity to avoid future hassles.

 

  • Amendment clause

There is an amendment clause in the home loan agreement which talks about the right to amend its content and conditions. You must carefully read the clause and ensure it is not detrimental to your interest. As per the agreement, an amendment cannot be made without the consent of both the parties after you have signed the loan agreement. Therefore, ensure that it is clearly mentioned that the lender cannot change the loan agreement without your knowledge.

 

  • Reset clause

If you have opted for floating home loan interest rates, you can expect a change in the interest rates as per market changes and RBI’s policies. However, if you have a fixed interest rate, it should be constant, throughout the tenure. However, many lenders plan to convert the fixed interest rate into floating interest rates after a few years into the tenure. This clause is typically mentioned in the home loan agreement. You must carefully look for it while reading the clauses. You must know if and when the lender proposes to change the interest rate. 

 

  • Prepayment and foreclosure clause

When you pay your home loan before the end of the tenure, it is called prepayment or foreclosure. Typically, lenders charge a prepayment fee. However, this is only for fixed interest rate loans. As per RBI’s guidelines, lenders cannot charge you a prepayment fee if your home loan is on a floating interest rate. You must look for the prepayment clause in the agreement and ensure you are not wrongly charged.

 

Whether you are looking to buy a new home or refinance an existing home loan, it is crucial to be aware of the finer details of the agreement. While you might have a basic understanding of loan agreement content, you must ensure that you read each line carefully and know about all the clauses mentioned in it. Therefore, ensure to do a thorough read of all the fine details of the agreement when you apply for home loan.

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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.