Home loan agreement: Important clauses that borrowers must know

[ecis2016.org] A home loan agreement is a legal document that regulates the terms and conditions of the loan and the creation of mortgage on the home. We look at the important clauses that buyers should check, before signing the document

Prior to the disbursal of the home loan amount, the borrower is required to sign and execute the loan agreement. The loan agreement regulates the terms and conditions of the loan facility being provided by the bank and the creation of mortgage on the home, in favour of the bank. Although it is often considered as a mere formality by most home buyers, the loan agreement is the most important legal document that contains the rights and liabilities of the home buyer.

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Home loan agreement clauses that may hurt home buyers

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According to Nishit Dhruva, managing partner, MDP & Partners, “The most important clauses in a loan agreement that buyers must keep in mind are:

• Clause allowing amendments to the loan agreement: Such clauses are very dangerous and are completely against the interests of the borrower, as the power to alter the terms of the agreement, in the event of a difficulty in the repayment of the loan/ mortgage of the property, lies with the bank. The borrower must ensure that their written consent is required, to alter any of the terms of the loan agreement.

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• Clause with respect to fluctuating interest rates: This clause empowers the bank(s) to alter the payable interest rates, as per the fluctuations in the applicable base rates. It enables the bank(s) to increase the interest rate in the future, when the market rates increase. On account of such interest fluctuations, fixed rate loans are often converted to floating rate loans. The borrower should, therefore, carefully read the loan agreement and ensure that the interest rate terms negotiated by him, are captured and adequately safeguarded in the loan agreement.

• Clause allowing assignment, in favour of third parties: This clause is against the spirit of trust, as the borrower intended to deal with the bank from which they procured the loan but end up having to communicate/ deal with other third parties.”

A loan agreement is not a mere formality and home buyers should not rush into signing the documents, caution experts. To get the best loan, the borrower should at the outset itself, negotiate the terms of the loan agreement, including the sanction amount and the interest rates.

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“Clauses have legal implications and need to be understood and adhered to, for the smooth completion of the loan,” points out Ramratthinam S, CEO, Muthoot Homefin (India) Limited. “After going through the loan agreement, if the home buyer identifies that some clauses are not clear or appropriate, he/she should ask for clarification from the lender, before signing agreement,” he adds.

One can also hire the services of a qualified legal professional, to represent the borrower, during negotiations with the bank.

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