NOW THAT YOU HAVE DECIDED UPON YOUR DREAM HOME, WHAT NEXT?
Home loan comes next. Do you need to be cautious here? Many would say, yes.
Terms and Conditions of your home loan
Read your home loan terms and conditions carefully. Understand the interest rate or cost at which the bank has lent you. A bank, for example, is eligible to demand additional security in case property prices fall during the loan tenure. Even if you pay your EMI loyally, this clause authorizes the bank to demand a security cover in addition to your loan amount. If you (the borrower) fail to provide such a security, the bank declares you a defaulter. It may not reflect in your EMI but the tenure gets extended midway.
Fine prints in the loan agreement
What is it? A contract the lender (bank/financial institution) enters with you (the borrower). The contract regulates the terms of your loan. The loan agreement takes effect as soon as the bank appraises your credit and the property you have decided upon.
In your excitement of the purchase of your dream home, it is highly likely that you tend to overlook various clauses in the loan agreement. However, these clauses, you must not forget, have significant implications on a range of things including interest rates and your repayment schedules. You may skim through the loan agreement as a formality and ignore points in it that you should be very careful about.The legal language typically reads a bit alien to you. But that should not hinder you from double-checking and clarifying each and every point therein.
Some clauses to watch out for
The loan agreement comes with a RESET CLAUSE. What is it? Banks can increase their interest rates on your fixed rate, should the market rates increase in the future. This makes your fixed rate loans equivalent to floating rate loans. This protects the banks from interest fluctuations. Typically, such RESET CLAUSE period ranges from two to five years, depending on the bank you borrow from. So read your loan agreement carefully for this CLAUSE.
Force majeure clause
This is a CLAUSE that allows your bank to unfix and raise the fixed interest rate under certain exceptional circumstances. This is mentioned under FORCE MAJEURE CLAUSE of your agreement. However, there is hardly any differentiation between “EXCEPTIONAL CIRCUMSTANCES” and “NORMAL”. Clear it with your bank.
What is fault?
To you “FAULT” may mean non-payment of your EMI during the loan tenure. However, your bank defines it differently. Home loan agreement of some banks defines FAULT as a case in which (i) the borrower expires (ii) the borrower is divorced (in case both you and your spouse are borrowers) (iii) the borrower is/are involved in any civil litigation or criminal offence. So, you should clarify this clause with your bank.
Security cover in the event of a slump in property prices
This clause empowers the bank to demand an additional security from you if and when property prices fall during the loan tenure. You will, then, have to give the bank a security cover in addition to your loan amount. If you fail to provide one, you are declared a defaulter.
Floating and fixed rate of interests
In fact, floating rate and fixed rate of interest on your home loan is linked to the Benchmark Prime Lending Rate (BPLR) of your bank. If the BPLR is 13.5 per cent, and your home loan comes at a discount of 1.5 per cent, you will be required to pay 12 per cent. The floating rate goes up directly proportional to the BPLR. In other words, if your bank raises its BPLR, the interest you will be required to pay also goes up and vice versa. That said, banks generally do not show the same alacrity in reducing their interest rates when the BPLR goes down. When interest rates come down, banks offer lower rates to new customers, while the existing ones continue paying higher interest rates. Do check with your bank on this Clause.
Home Insurance Clause
Home Insurance is not a popular choice in India. Yet, it is in your best interest that you insure your home. Your bank too requires you to insure your home. This is necessary because it covers your home from damages or losses caused due to fire and other perils such as lightening, storm, flood and even a possible risk of an act of terrorism. However, choose a home insurance policy with care. Check if it covers the structure of the house or the contents of the house such as valuables, furniture and electronic appliances. You can also opt for both. People are fooled into believing that they get a cover of a crore or two if they buy an expensive policy. Nothing can be farther from the truth. Structure cover is based on the area of the house and the approximate cost in the locality where your home comes. The sum insured will be the area of the house multiplied by the construction cost per Sq. ft. In content cover, you will be required to disclose the valuation of all insured items. Bills and invoices will help you do that. Do make sure the details of coverage when you take a home insurance.
We, at Mahaveer, stay committed to making your Mahaveer experience confident, safe and secure.