MONEY MATTERS :Six most important home loan terms & conditions a borrower must know

The demand for housing loans in India has increased after COVID-19. Our country has also seen an increase in first-time homebuyers in recent years. Thanks to government schemes such as the Pradhan Mantri Awas Yojana (PMAY) and the Credit Linked Subsidy Scheme (CLSS). PMAY has been successful in providing interest rate subsidies on home loans to eligible individuals, which may raise demand for housing loans.

Now, before borrowing a loan from any lender, every home loan borrower must understand and check the six most important terms and conditions that are given below. Most lenders have unique policies for terms and conditions that follow RBI guidelines, which may differ from one lender to another.

To avoid further complications, every borrower should check the six most important ‘Terms and Conditions’:

1. Interest rate options: Lenders usually offer the following interest rate options:
Floating rate: The EMI for a floating rate loan adjusts in accordance with changes in market interest rates. If market interest rates rise, EMI will rise proportionally, and vice versa.

Fixed rate: The interest rate is fixed either for the entire tenure of the loan repayment or for the EMI payable to the bank. If interest rates rise over time, a fixed EMI remains stable and appealing, making it easier to manage.However, in this case, the drop in interest rates would not benefit the borrowers.

Hybrid rate: The interest rate is fixed for a set period during the term of the loan. After the term ends, the rates may increase (reset clause). Borrowers must verify the lock-in clauses, which include the initial rate agreed upon as well as the term of the lock-in.

Some lenders determine their interest rates on the basis of Benchmark Prime Lending Rates (BPLR)as well. Borrowers should evaluate the index when determining interest rates. It will give a clear idea of how it has historically changed. However, the previous fluctuation of any index does not indicate its future behaviour.

2. Fees and charges: A home loan often requires payment of various fees, such as processing fees, administrative charges, documentation, late payment, changing the loan tenure, changing from a fixed to floating interest rate, and vice versa, legal fees, technical inspection fee, recurring annual service fee, document retrieval and storage charges, bounce charges, and CERSAI. Every lender should provide an estimate of its fees. Many of these fees are negotiable or can be waived also.

3. Pre-EMI interest: The loan amount will be disbursed in instalments based on the progress of the construction, in the case of home construction. The borrower may be obligated to pay interest on the amount disbursed prior to the loan’s final instalment. The pre-EMI interest is payable each month from the date of each disbursement until the EMI begins.  

4. Insurance: Most lenders are offering insurance with their home loans. The insurance premium is usually added to the loan amount and paid along with the EMI. However, according to the guidelines, insurance is optional, and the borrower can obtain it if he is interested in the policy. Typically, the premium amount is determined by the borrower’s age, loan amount, and loan tenure.

5. Creation of mortgage: The security for a home loan is often a first mortgage on the property, either through the deposit of title deeds or the execution of a registered mortgage deed at the sub-registrar office, depending on the collateral and lender’s policy standards. However, depending on the locality, execution fees for these deeds typically range from 0.50% to 2% of the loan amount.  

6. Part-payment and foreclosure charges:  These charges are imposed by the lender when a borrower chooses to repay a part of the loan amount or foreclose on the loan before the loan term ends. Depending on the lender’s internal policy standards, these fees might range from 1% to 5% of the outstanding loan amount. However, lenders are not permitted by RBI regulations to charge part-payment or foreclosure fees based on different types of interest rates. However, before obtaining the loan, borrowers must examine the applicability of these charges for themselves.

Finally, understand these six most important terms and conditions, based on which an informed decision can be made while borrowing a home loan from any lender. It is essential for borrowers to assess various loan options with different lenders and select the one that is the best fit for him or them. Before signing the loan agreement, it is also important to read the agreement and comprehend the terms and conditions.

(The writer, Ch Lakshmi Kanth, Head, Risk & Credit Compliance, IKF Home Finance)