Fixed home loan

That fixed home loan rate is really not fixed.

When interest rates were falling, several borrowers discovered that lending rates did not always come down. Now when rates are rising, fixed rate borrowers discovering that not all fixed rates loans are really fixed.

Six years ago, a Thiruvananthapuram couple had availed of a Rs 7 lakh home loan at what they believed was a fixed interest rate of 7.5% from a public sector bank. The equated monthly installment (EMI) worked out to Rs 8,609 for 10 years. However, three years into the loan, they received a notice from the bank saying their EMI was being to approximately Rs 9,300. They also learned that the bank was calculating interest at the rate of 8.25% as against the promised fixed rate of 7.5%.

On enquiry the couple learnt that their loan agreement had a reset clause where by fixed rate loans could be re-priced every three years. We were first offered a floating loan at a 0.5% lower interest rate, which we did not take up since we wanted a fixed loan for the entire tenure. The bank executive did not even mention the reset clause once. They now pay an EMI of Rs 9,500 to quickly pay off the loan.

Considering they signed on each page of the loan document, there is no documentary evidence to prove otherwise – whether it was an oversight on their part or missing by the bank executive. It is for such eventualities that over the years, consumers have been advised to carefully comb through the most important terms and conditions (MITPs) of a loan documents for clauses, which can potentially overturn one’s entire repayment calculation. Yet, several such cases continue to reach the banking ombudsman’s office.

We cannot do much because interest rates are left to banks’ discretion. People don’t really go through the fine print because they are in a hurry to get a loan. There is an implied risk in that case.

There is hope for such consumers. To undo the damage to some extent, a senior Mumbai banker advises first discuss the problem with the bank. If a bank is convinced that a customer is genuine and his potential viability is high, it may just renegotiate the loan. The bank could conduct a counseling process and then put it in black and white.

As chances of such a compromise solution are rare, another senior banker suggests negotiating a lower rate of interest with another bank, although the consumer must also factor in the prepayment penalty which is usually 2-3% of the outstanding principal amount.

Consumers must know that banks these days usually include a reset clause. When you have a loan for 20 years naturally there will be provision for revising the rate. Banks have realized that a fixed rate of interest is a costly proposition.

Consumer groups say to nip related disputes in the bud banks must make it a point to mention the reset clause upfront with all their implications while selling the loan itself.

P S of Ahmedabad based Consumer Education Center adds the reset clause details must be written down upfront in both font in the document so that consumers do not miss it while signing the sheaves of documents. H K A of Delhi’s Consumer Voice says if the clauses is mentioned in the fine print, it is a genuine ground for approaching the consumer court.

It should also be made mandatory for the bank’s managers or officers to explain to the loan taker about any such hidden clauses like reset clause and show it in the documents.