Home owner ship is no longer a far-fetched dream, thanks to easy home loans. However, going through all the relevant details, conditions, and clauses of a home loan agreement is imperative for a smooth repayment experience. Of the two kinds of home loan interest rates – fixed and floating – if you’ve opted for the latter, there is one additional clause you need to be aware of – the home loan reset clause.
What Is the Home Loan Reset Clause?
A home loan reset clause is a provision in the home loan agreement, which gives the lender the flexibility to review home loan interest rates and reset them after a specified number of years. Meaning, your fixed-rate housing loan will later be converted to a floating rate home loan. This is done to ensure that the new interest rate is in line with the prevailing market rates.
The reset clause gives the lender the authority to increase interest rates in proportion to an increase in market rates.
When Is the Home Loan Reset Clause Applicable?
Typically, home loans involve two kinds of interest rates – fixed and floating. Earlier, borrowers usually chose the fixed rate as the home loan interest did not change throughout the loan tenure. However, many are gradually realizing that the floating rate is more budget-friendly. Plus, even if the interest rate does rise owing to prevailing market conditions, it will most likely not be for the entire tenure, but only for a short period.
Hence, borrowers who opt for floating home loan interest rates are the ones to whom the home loan reset clause may be applicable.
How Does a Housing Loan Reset Clause Work?
If you apply for home loan with mixed interest rate types, you can expect the home loan rates to remain fixed for a specific period, say, for two or four years, depending on your lender. Once this period has elapsed, the loan will automatically be converted to a floating rate home loan, wherein interest rates will fluctuate to match the prevailing market rates. This fluctuation depends on several market factors such as prime-lending rates, benchmark rate, etc.
It is important to remember that the fixed home loan interest rate charged during the initial years is generally 10 to 20 bps (basis points) higher than the prevailing floating rates. If you’re taking a home loan online with a reset clause, acquaint yourself with the changes in monthly outflow that may follow.
Before you opt for a housing loan with a reset clause, it is essential to carefully go through your home loan agreement as there might be other conditions attached to it. For instance – an interest rate hike may be applicable on borrowers who borrow above a specified amount or beyond a specified tenure. If this is the case, the period after which a hike is applicable, along with the hike rate, will also be mentioned.
Are you planning on buying a house with the help of a home loan? If so, then make sure you carefully consider your home loan eligibility and EMIs before applying.
For this, you can use free online home loan calculators such as home loan eligibility calculator and home loan EMI calculator.
However, remember that if there’s a reset clause attached, the EMI calculator for home loan will help you determine the EMIs for the fixed period beforehand. You will need to be prepared for interest rate volatility for the floating rate period.