Home Loan Agreement: Important Clauses that Every Buyer Must Know
Buying a home can be a complicated task. Yes – the prospect of decorating your new abode as per your taste and making it your most comfortable zone sure is exciting. But with the agog comes the burden of the many financial responsibilities! The home loan, paired with the heavy installments, the complicated calculations of the interests and your constant fear of ‘defaulting’ – all of this can make the experience a taxing one for you.
Taking a home loan can be one of the most significant financial transactions that you will ever make in your life. Quite often, I have seen how first-time home buyers do not prepare themselves before making a wise purchase decision. At times, they barely check the home loan agreement and sign the document without going through the clauses. You need to understand that the house you buy is your fortress, your shelter from the heat waves, winter winds and the predators. Therefore, you have to take every step to secure it like using a mortgage broker.
Reviewing and understanding every clause of your home loan agreement is the most crucial step. If you are a first-time buyer, I have put together a checklist of the clauses that you must go through before you sign the agreement.
Fixed/Fluctuating Interest Clause
The interest clause is undoubtedly one of the more critical clauses in a home loan agreement. When it comes to real estate loans, you must remember that there are two types of interest rates – fixed fee rates and floating fee rates. A fixed fee rate does not change during the course of the loan (generally 8%). A floating fee rate is generally a lower interest rate margin along with a benchmark rate. In Australia, the bank bill swap rate is usually used as the benchmark rate which changes according to the Reserve Bank of Australia’s cash rate.
Most home loan agreements are as per the fixed rate fee. In case it is based on the floating interest, then you must go through the terms and conditions carefully. The calculations are also likely to get more complicated if the agreement is structured on the floating fee basis. Since the bank can alter the payable interest rates as per the fluctuations in the base rates, you might have to pay higher interest in the future. So, read the loan agreement and ensure that the interest rate terms are safeguarded in the loan agreement.
Clause for amendments
The clause for amendments is the one that you would want to avoid, because they are completely against the interests of the borrower. Under this clause, the power to alter the terms of the agreement rests solely with the bank. Therefore, you must ensure that the clause does not leave any scope to modify any of the terms of the loan agreement.The terms and conditions of a home loan agreement should be finalised first and only then should it be signed by the borrower that is you and the lender, most often the bank.
Both the parties must agree to the terms for the repayment and the disbursal of the loan. And once signed, any changes or provisioning made to the agreement must be counted a breach of trust. Always read through the contract properly. If you find clauses about amendments, then do not sign it. Raise an objection against it and ask for a revised copy of the agreement devoid of such a clause.
The definition of Default
The default clause sets out the implications and penalties in case you fail to pay the loan installment amount on time. In case the home loan agreement is repayable on demand, there will be no scope for a default. The lender – be it the bank or any other financial institution – can recall the loan at will, thus relieving the borrower of all his/her contractual obligations. If the loan is a fixed term loan, then the Default clause is very important.
Pay attention to the aspects given below:
Breach of the Loan Agreement – A violation of any of the terms as stated in the Loan Agreement will automatically amount to a default.
Non-Payment – If you fail to pay either the interest or the capital amount, it is going to be considered as a default. However, what you need to remember is that there is a provision for a grace period, after the expiry of which non-payment can be viewed as a default.
Insolvency – If a borrower goes into bankruptcy and is unable to repay the home loan, then the case is deemed as a default.
Clause allowing assignment
When you take a loan from a bank, make sure that there is no clause in the agreement that allows the entry of a third party. A home loan agreement should always be bound to two parties – the borrower and the lender. If the lender assigns another party to whom you will be accountable, you may end up dealing with other third parties. The biggest problem with this clause is that this might add to the confusion of an already complicated procedure.
Security cover clause
Like every other loan agreement, a home loan contract also has the option of additional coverage. Under the provision, the lender enjoys the prerogative to call upon the borrower to provide extra security that can be used to safeguard the principal home loan amount. Most often, banks and other financial institutions disburse a loan on the basis of the collateral security provided by the person taking a loan. Like every other asset, collateral mortgages also depreciate in value with the passage of time.
In such a case, banks ask the borrower to provide some additional security to fill the gap. If you find a security cover clause in the agreement, then I would suggest that you read through the content carefully and ask for changes and explanations before you sign the document.
You already know the types of defaults a borrower can commit during the loan period. Now, what happens after you default a payment? You are penalized with a default interest that you have to pay along with the next loan installment. The default interest clause in the home loan agreement must state the increased interest rate that you have to pay along with the amounts of installment which you have failed to pay.
What you need to check is whether the default rate stated in the agreement accurately reflects the cost with effect to the amount that has not been paid or not. If the rate is excessively high, then it will be deemed as the penalty rate, and therefore not be enforceable.
The Prepayment Clause
There will be times when you might have the amount ready in hand but you cannot pay the loan according to your convenience. This makes it imperative that the loan agreement has a pre-payment clause that allows the borrower to repay the loan early, thus making the agreement more flexible. However, while at it, do keep in mind that the repayments should only be allowed at the end of an interest period in order to avoid any payment of breakage costs.
Committed or Uncommitted Clause
A loan can be either committed or uncommitted. In the case of a committed loan, the bank will be obliged as per the contract, to lend you the loan amount only after the Conditions Precedent (CPs) have been satisfied. The conditions are generally set out in a separate schedule in the home loan agreement. And if the loan is in an uncommitted clause, then there is no need for a CP schedule.
You need to remember that once you sign the home loan agreement, you will be bound to all its clauses and content. You won’t be able to change any of it and going against the agreement would amount to a breach or a default. I would suggest that you hire an expert who can help you understand the implications of these clauses so that you can take the right decision about purchasing your abode.
Author Bio: Shirley Brown is a prominent lawyer and acts as a guest lecturer in several law colleges across Australia. If you are a law student wondering, “Who can write my paper?” – then she is your go-to person. She is associated with MyAssignmenthelp and provides quality online assignment help.