Escalator Clause

An escalator clause is a provision is a loan agreement that gives a lender the permission to increase interest rates as much and as often as they deem fit.

While such a clause effectively allows a bank to charge as much as they want for their loans, banks have to consider various factors before taking any actions that might be deemed as an abuse of their rights.

This is because borrowers can easily switch and refinance their home loan with other lenders if they feel that they are being taken advantage of by their lenders.

On top of that, financial institutions value their reputation and credibility the most.

Putting that at risk from bad publicity can potentially affect their businesses negatively in the long run.

This is why lenders often project an impression of regret and empathy when notifying borrowers of rate increases. This would inevitably be followed up with justifications on why they had to make the tough decision of raising rates.

While escalator clauses have an adverse effect on a borrower’s position, they can still depend on contract terms such as interest rate ceilings and national regulations on maximum interest rates to protect them.

Something to be mindful of is that property loans containing escalation clauses are not the same as adjustable rate mortgages.

The former concerns a deliberate act on the part of the lender, while the latter concerns market forces dictating the movement of home loan rates.

Escalation clauses are actually common in lending agreements and can be most often found on long term loans.