Buying a home is one of the most significant investments that one makes in his lifetime. Most of the times, buyers take a home loan route to finance their investment. When there is a loan, there needs to be an agreement between the parties involved., i.e., the borrower and the lender, laying down the terms and conditions of the loan. The agreement between the bank/financial institution and the borrower is called the home loan agreement.
As it carries all the essential terms and conditions of the loan and is also a legally accepted document, you must be aware of the clauses included in this agreement. More so, it is through the home loan agreement; a mortgage on your house is created.
Clause in case of a change in interest rates
When you opt for a floating rate on your home loan, the interest rates vary according to the changes in the benchmark set by the bank (Currently MCLR). This is normal. However, even when you go for a fixed rate of interest, certain banks include a clause which allows them to revise the fixed rate of interest as well or convert them into floating-rate loans.
Before signing the document, make sure all terms and conditions negotiated with regards to the rate of interest are adequately reflected in the document.
Clause regarding amendments
A home loan agreement, once signed by both the parties, can be amended only with the consent of both the parties. However, some home loan agreements allow the bank to change the agreement unilaterally. This clause is detrimental to the interests of the borrower. If there is such a clause included in the loan agreement, you must ideally get it removed before signing the document.
Clause regarding pre-payment or part pre-payment
Pre-payment or part payment of the loan amount is one of the ways by which an individual can significantly reduce a home loan burden. However, if your loan agreement allows for penalty /fee against pre-payment or part-pre payment, it might be against the best interests of the borrower. According to RBI regulations, all floating rate loans must be allowed to be prepaid or part pre-paid without any penalty.
Clause regarding the assignment of the loan to third parties
A home loan agreement is like a contract between the lender and the borrower. In some instances, the lender may assign your loan account to a third party. The conditions underlying the assignment is mentioned in the agreement.
Generally, it is done in case of a default or change in the business dynamics of the lender. Make sure you thoroughly understand the conditions attached with this clause, as you do not want to be dealing with a third party for your home loan at a later date.
Clause regarding additional security cover
A home loan is disbursed on the mortgage of the house that is bought with the loan. Specific clauses require you to make provision for additional security cover in case the value of the mortgaged property falls over the tenure of the loan. This clause is inserted to safeguard the interest of the lender through the tenure of the loan.
Home loan agreement is an important document, which holds good till the end of your loan tenure. So take time to go through the entire document and sign only after you have understood it well. You might even consider running it through a lawyer if you do not clearly understand the legalese involved in the document.