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What is an Acceleration Clause and what is its significance?
An acceleration clause is a covenant in loan agreements that are often found in property deals. In such clauses, the lender asks the borrower to repay the entire outstanding amount of the loan if certain conditions are not met. These conditions are usually mutually agreed upon during the negotiation phase of the issuance of the loan.
Acceleration clauses protect the lenders in an uncertain market condition and offer them the assurance of getting the revenues back on his or her investments.
Acceleration clauses are invoked mostly for payment irregularities but they can also have other reasons. However, all types of acceleration clauses ask for complete payment of the remaining amount of loans. The borrower, however, may get a relaxation in the interest amount he/she chooses to pay the entire sum of the remaining loan amount.
Common Triggers of Acceleration Clauses
Following are the common triggers of Acceleration clauses −
Inability to pay interest payments
Failure to pay the periodic interest payments can trigger an acceleration clause. Usually, the interest rates are agreed upon during the payment of the loan and it also contains instructions of how many such payments can be missed. Once the number of repayment occasions missed, acceleration clauses come into effect.
Failure in meeting mortgage requirements
Property loans usually consist of interest and mortgage payments. Partial or complete inability to pay mortgages can result in an acceleration clause being triggered.
Due-on-sale clauses
These clauses occur if the borrower sells the property for which interests have not been paid fully. Once the borrower sells the property, the lender may ask the borrower to repay the entire outstanding amount of loans.
Breach of debt covenants
These are aimed to provide the lenders have a sense of security while offering a loan to a borrower. The covenants usually limit the borrower and help mitigate the risk of the lenders. On breaching the terms mentioned an acceleration clause may come into effect.
In an acceleration clause, the borrower gets full ownership and title of the home if the total amount of outstanding loans is paid. Otherwise, the lender gets ownership of the property.
Points to Note
Acceleration clauses are meant to offer security to lenders.
Acceleration clauses may come into effect for various reasons but all of them require the entire remaining loan to be paid at once.
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