Know about Money Market Clause in Home Loan and how it impacts the Borrowers
Dec 26, 2018 Home Loan
If you are not aware of, in all builder-buyer agreements you can find a force majeure clause providing builders with a cushion of not paying any penalty to homebuyers if there are any project delays due to some unforeseen circumstances, such as “an Act of God”. You can observe an equivalent clause when it comes to a home loan agreement. It’s called money-market clause. A home buyer who is planning to purchase a property by availing home loan must understand such terms.
What is force majeure with respect to home loans?
If there is any unexpected circumstance, such as natural calamity, occurs that it gives an opportunity of an excuse to prevent somebody from doing something that is written in a contract. Banks also have a similar excuse on external conditions in case they are unable to meet commitments; for instance, change in the rate of interest in any unexpected conditions.
What is the money market clause?
In a loan document, this clause states that the lender has the right to change the interest rate depending upon the prevailing market conditions despite availing the loan at a fixed rate of interest.
Then what is the point of availing loan at a fixed interest rate?
The purpose of avail a loan on a fixed rate gives you a sense of certainty. It’s a predetermined rate where the loan is serviced despite market conditions. In case if you go for a floating rate of interest, the prices are indeed cheaper, depending on the two types of rates. For instance, ICICI Bank offers floating home loans which are between 9 and 9.20 percent. On the other hand, the fixed rate is between 9.4 and 10.05 percent. At Axis Bank, the fixed rate of interest is at 11.75 percent for a period of 20years, whereas the floating rate is at 9.2 per cent. Besides, if any borrower decides for pre-payment, charges are applicable which is not true in case of home loans with adjustable rates.
The rates would remain fixed only for a certain period unless a home loan borrower managed to get an agreement with the lender for a fixed one for the entire tenure. Based on your agreement, lenders will retain the rate for some years. The lenders reset the interest rate that is linked to the marginal cost of funds based lending rates after one year. Therefore, for that period it remains fixed.
Do note that some lenders do not offer a fixed rate of interest on home loans.
Despite all these loopholes of higher cost, experts believe that one should go for a fixed rate home loan when the rates are low.
The rates would remain fixed only for a certain period unless a home loan borrower managed to get an agreement with the lender for a fixed one for the entire tenure. Based on your agreement, lenders will retain the rate for some years. The lenders reset the interest rate that is linked to the marginal cost of funds based lending rates after one year. Therefore, for that period it remains fixed.
Do note that some lenders do not offer a fixed rate of interest on home loans.
Despite all these loopholes of higher cost, experts believe that one should go for a fixed rate home loan when the rates are low.
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