Check These Clauses in Your Mortgage Agreement
Posted On July 30, 2013
Always scan your loan agreement thoroughly to understand what each clause implies before you sign on the dotted line. A few points to check are:
Rate of interest: The rate of interest determines the equated monthly installment (EMI). The rate of interest, generally, can be of two types – fixed and floating, though the latter is the most common these days. There is another addition to this category now called teaser loans which costs you less in the first few years. Keep a check of variable (floating) rates which varies from bank to bank.
Reset clause: In the case of a fixed interest rate, the rate is usually static but there is a reset clause which allows banks to reset the fixed interest rate in relation to the base rate at particular intervals.
Prepayment penalty: The prepayment clause explains the penalty that is charged if you decide to repay the loan early. Some banks do not impose any penalty while others impose a penalty according to different circumstances. For instance, when you refinance the loan through another bank to take advantage of a lower interest rate, such a prepayment may involve a different or heavier penalty from the current lender.
Defining a Default: For you a ‘default’ could simply mean not paying your EMI at some point in your loan tenure. However, some banks also consider other events as a default, including: when the borrower dies, the borrower is divorced and stops paying (in case of more than a single borrower), or the borrower is involved in any civil litigation or criminal offense. Therefore, you must be clear about what your lender means by the term ‘default’.
Security cover: This clause states that a bank is eligible to demand additional security when property prices fall. Such a demand could be made even if you are current with your EMIs. In such a scenario, if you are unable to provide additional security cover, you could be declared a defaulter by the lender.
Interpreting the clauses
Teaser loan features: Teaser loans charge you less interest at first and the interest rate then increases to match market rates.
Floating rate loan: The bank increases floating interest rates as soon as the Central Bank raises rates. However, many banks do not decrease floating interest rates with the same enthusiasm.
Fixed rate loan: Though fixed rates are fixed over the period of the loan, banks insert a clause for resetting the fixed rate based on market conditions.
Prepayment penalty: Discuss upfront with your bank about the prepayment penalty they charge and whether it works differently when you opt to prepay and refinance the loan. Nowadays, the UAE Central Bank sets a maximum limit that banks can charge.
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