Definition
Legal Clawback
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A legal clawback is a contractual clause in the mortgage agreement that stipulates legal subsidies granted by the lender has to be paid back under certain conditions.
This clause comes with a clawback period in which the clause if active, after which it expires.
When a bank has give a home buyer cash rebates or legal subsidies to offset the considerable costs of legal fees, the least it can expect from the borrower is to commit to the home loan for a short period of time.
What sense does it make for the lender to offer such freebies should a borrower refinances the loan with another bank a year after taking it in the first place.
The legal clawback is a counter-measure implemented by banks to deter borrowers from taking advantage of them.
In a way, it is also an effective tool to prevent customers from refinancing even though the lock-in period has passed.
Because if a borrower has found a better housing loan with lower interest rates, the thought of having to return the money for legal fees can be a turn-off big enough to defer refinancing.
For example, if a borrower’s current mortgage contract has 6 more months before the clawback clause expires, why not wait for 6 more months before refinancing?
While this line of thought is pragmatic, the question that should also be asked is whether loans with attractive enough rates would be available in 6 months.
for the last 36 months?
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