A mortgage loan agreement is a document that legally binds the borrower and the lender by its terms and conditions. Once a home loan borrower and a lender sign the agreement, they must abide by it. Once you have signed the mortgage contract, it is not easy to go back. It is therefore always good to take your time and read the mortgage contract carefully. Let’s take a look at some important clauses in the home loan agreement that you should read before signing it.
Interest Reset Clause
With home loans taken from banks, floating interest rates are currently tied to an external benchmark such as the repo rate. Each time there is an increase or decrease in the reference rate, the linked loan rate is reset accordingly. The reset frequency will be once every three months. However, it may vary from one bank to another and its details are mentioned in the loan agreement. Some banks reset their interest rate immediately by changing the benchmark rate, while others reset it monthly or every three months.
“Depending on the type of lender, the way the interest can change and therefore change your EMI is different. In the case of banks, check how often the interest rate may change and whether there will be a separate notification for the same,” says Soumee Bhatt, General Counsel of Bankbazaar.com. “For HFCs, this may be related to the ‘interest gap’. For example, if the HFC increases its internal RPLR, your EMI will automatically increase. However, your EMI may not automatically reduce because the HFC will offer a “less interest spread” without reducing the RPLR. You must approach the HFC to purchase a lower interest spread by paying a conversion fee.
Banks do not charge prepayment or foreclosure fees on variable rate home loans. However, if you have taken out a fixed rate loan, the bank may charge a fee according to the rate mentioned in the agreement. Reading this clause can help you develop the right repayment strategy.
LTV margin (safety clause)
The bank authorizes a home loan up to a certain percentage of the value of the property depending on the borrower’s income, credit score, age and ability to repay. This is also called loan to value (LTV). In the agreement, the lender may include a clause stating that if the value of the underlying property declines during the term of the loan, causing an increase in the LTV ratio, the lender may require the borrower to deposit the necessary funds to restore the original. LTV report.
Amendment to the loan agreement
Any amendment to a loan agreement is not possible once it has been signed by both parties. To make an amendment, it is necessary that both parties mutually agree to an amendment. A unilateral modification of a loan contract constitutes a breach of trust and cancels the contract. Identify and avoid points in the agreement that allow the lender to modify the agreement.
Normally, when the borrower fails to repay the EMI loan on time, the bank marks it as default. However, there are other situations where the bank may consider a borrower to be in default. Some default circumstances are the death of the borrower and divorce when there is a joint loan application by husband and wife. Read the agreement carefully to understand the different situations that may invoke the default clause.
What else should you know?
Some lenders may require you to notify them if there is a change in employment or address, and there may be a penalty if you do not. Read these clauses carefully and understand them before signing on the dotted lines. Remember that there is no turning back once the agreement is signed.
* The interest reset clause details the conditions for changing interest rates and how often
*Security covenant may require borrower to deposit additional funds if property value drops in order to restore LTV ratio
* Death of borrower or divorce of joint husband-wife borrowers may invoke payment of default clause