26 SEPTEMBER, 2019

From searching the right house to finally purchasing it, home buying process consists of many steps. But the most important part is getting a home loan. After researching for months, you finally find a suitable lender and start the process to avail a home loan by applying for it. The next steps involve home loan documentation, verification and other processes, and one day lastly you reach to the last step where you sign the loan agreement. 

Your home loan agreement is a very important document containing technical terms, which many people find difficult to understand. While it is difficult to have a thorough understanding of all minute details for a regular  customer, there are a few important clauses of the agreement that you must know about. Let us take a look at these:

Amendment Clauses

Home loan agreement is signed by the borrower to abide by the terms as defined in the agreement. In case the lender amends the terms and conditions in the home loan agreement in the future, it will be considered as a breach of trust. Hence, no amendments can be made to a home loan agreement unless both the lender and the borrower agree and acknowledge the same. Hence, you need to be super-cautious while signing the amendment clause from your home loan agreement.

Interest Fluctuation Clause

There are two types of interest rates on a home loan, namely, fixed interest rate or floating interest rate. When you go with the fixed interest rates, the interest rates mostly remain the same throughout the entire tenure of the home loan. On the other hand, floating interest rates may change along with market fluctuations.
If you select the floating interest rates, you need to sign a clause named the Interest Fluctuation Clause. Your signature will enable the lender to reduce or increase the interest rate according to MCLR.

The Definition of Default

Generally, not paying the home loan EMIs is considered as default of a home loan. But lenders sometimes change the definition of default. There can be multiple instances that can turn the borrower into a defaulter such as a divorce (if the loan was a joint loan), being convicted for a civil or criminal offense etc. Also, a borrower might be considered a defaulter when he/she has defaulted for any other loan given by the same or different institution.  

The Repayment Clause

Another important clause in the home loan agreement is the repayment clause. This clause denotes the type of payments such as the part payment and prepayment on your home loan. Generally, many banks do not charge any amount as part payment penalty or pre-closure penalty. All these clauses are mentioned in your home loan agreement clearly. So, check the rules and regulations of the lender on the home loan repayment before signing them.

Many borrowers overlook the clauses mentioned in the home loan agreement. However, most of these important clauses are indeed easy to understand. After signing a home loan agreement, you are obliged to follow the rules and regulations set by the lender. So, in case of any confusion in the future, you may become helpless and have a little say in your support when you have signed the home loan agreement. To avoid such instances, you must know every clause in a loan agreement before signing on it.

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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.