Why you need to be careful when your bank changes your home loan rate

American writer Laura Ingalls Wilder once said, “Home is the nicest word there is.” And for most of us, a place of our own begins with a visit to the bank. For most, the first step towards a home is to avail a home loan. And since a house is the biggest investment many ever make, one has to be extra careful with the home loan paperwork and understand the terms and conditions.

Picture this: You availed a home loan at 7.5 percent fixed rate, say in August 2005. Now it’s November 2011 and you get a letter from your bank to pay an additional interest on the grounds that your interest rate has been reset after three years, as per the bank’s internal policy. You refuse to make the payment stating that you’ve borrowed the loan at a fixed rate of interest. The bank refuses to listen and threatens further action. Meanwhile you keep telling the bank that you took a loan at a fixed rate which was at 7.5 percent. Now, you fear that the bank may classify your loan as a default case, since you refuse to pay the additional interest.

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**This happened for real:**If you thought this is an imaginary situation, it is not. This happened for real and is cited in an RBI document. After several requests to the bank, the customer finally approached the banking ombudsman (BO). The ombudsman investigated the matter and verified the loan agreement. The BO found that as per the bank’s loan contract the original interest was 7.50 percent and there was no enabling clause to reset the interest periodically. The bank however argued that they had issued an internal circular regarding the reset clause, but the bank branch failed to incorporate this clause in the loan document due to oversight. The RBI document said, “The BO held that as the loan document did not carry any provision for interest reset every three years, the bank’s action of revising the rate without prior notice to the borrower was arbitrary and contractually not binding on the customer.” The BO told the bank to roll back all interest revisions and refund the excess recovery back to the customer.

[caption id=“attachment_1089525” align=“alignleft” width=“380”]  Pic courtesy: ireoworld.wordpress.com[/caption]

What we can learn: Clearly the bank branch had goofed up in this particular case, even when the bank has issued an order regarding the reset clause. First, this incidence clearly shows that bank branches can surely go on their own trip while drafting the loan agreements. This means, when you avail a loan from the bank, make sure you understand all the terms and conditions of the loan agreement. Second, when your receive an intimation from your bank about any change in the interest rate, go back to your original loan agreement and check if the change is indeed a part or as per the terms of your loan contract. If you find any discrepancies, ensure you approach the bank and if you still don’t get a resolution, approach the banking ombudsman.

A simple online search on home loan complaints will throw various cases where banks have goofed up with customer’s home loan agreement. It is thus wise to figure out what can go wrong in advance, so that you can be cautious and avoid having to face an unpleasant situation. This logic seems true even when it comes to dealing withhome loan agreements and interest rate changes.