Ever wondered why your home loan interest rates seem to be increasing without any apparent reason? Well, you must have guessed that your credit score has come down and it could be due to a few hidden factors which one would never realize otherwise. Your bank has the power to change the rate of interest on your home loan in case your credit score goes down.
For home loan borrowers, there is an obvious benefit in place with banks shifting to external benchmarks for floating rate home loans. The whole system is more transparent and there are immediate benefits of rate cuts in the bargain. However, home loan borrowers should now be more careful when it comes to their credit histories. Banks can charge a credit risk premium which is part of the spread over and above the external benchmark rate for working out the final rate of interest on the home loan. They can also re-rate their borrowers and revise the rates of interest throughout the loan life cycle if there is a considerable credit assessment change of sorts.
What to keep in mind in the current scenario
A few banks such as Union Bank of India, BoB (Bank of Baroda) and Syndicate Bank will be depending on credit scores while some institutions such as Axis Bank and SBI (State Bank of India) will be depending on internal assessments of risk. Bank of Baroda, for example, will be changing interest rates in case of any adverse deterioration witnessed for the CIBIL score of a home loan customers.
Syndicate Bank will raise interest rates in case the customer’s CIBIL score comes down by more than 50 basis points. In case a borrower applies for a car loan and home loan together from the same bank and defaults on one loan while regularly clearing payments for the other, then the credit profile will be negatively impacted and the rates of the other loan will go up as per reports.
Aspects which can jack up your interest rates on home loans
Here are the 5 hidden aspects which may sometimes increase interest rates on home loans.
- Huge property investments- Real estate is one of the most preferred investment avenues for Indian citizens. If you already have two or more homes and are applying for a home loan for another property, you will naturally be charged higher rates of interest. This will be at least 25-50 basis points more than what you expect even if you have a good credit score. This is because banks always take it as commercial lending whenever they provide loans to people with two or more properties based on RBI (Reserve Bank of India) guidelines. This situation stays the same even if you are a co-owner/joint owner of multiple homes.
- Using credit card for regular borrowings- Credit cards are usually perceived as short-term solutions for obtaining funds but your credit score is impacted by the purposes for which credit cards are used. In case you are using the credit card only for convenience and clearing off the whole payment on the due date on a regular basis, the CIBIL score will naturally be on the higher side. However, if your whole payment ecosystem and all borrowings revolve around credit cards, your CIBIL score may be negatively impacted even when you are sincerely paying the minimum due amount every month.
- Higher utilization of credit- You may have a great repayment track record for all your loans so far but your credit score may still come down in case you have a propensity to come closer to your credit limit on a regular basis. High credit utilization or over utilization can lead to negative impacts on CIBIL scores. You can tweak this out by choosing 2/3 cards as opposed to one credit card. Always make sure that utilization of credit never crosses 40% of the overall credit limit available for all your credit cards.
- High need for credit- No-cost EMIs and festive offers always induce people to splurge on appliances, clothes and other items like gadgets. Yet, the tendency of a customers to keep overspending with credit can negatively affect the credit score and raise home loan interest rates. The tendency to borrow credit frequently will lower the CIBIL score. In case there are a large number of inquiries received by credit information entities from several lenders, it denotes that you are hungry for obtaining credit. A large number of hard inquiries will naturally bring down the credit score.
- Not following ECS guidelines- Borrowers investing money in SIPs (systematic investment plans) may think that this is not under the purview of the home loan sanctioning lender. Yet, credit scores may be impacted in case of any bounces in the ECS mandate for these SIPs. These cases will work negatively and banks will perceive the borrower as financially undisciplined. The same thing occurs if you do not pay insurance premiums in a timely manner.
You can always keep your credit score safeguarded by making sure that you have repaid all past loans before applying for a new home loan or credit card. Get the no-dues certificate or acknowledgement letter from your previous lenders which confirms the clearance of all debt that you took on in the past. Otherwise, any discrepancy in updating this information or failure of your lender to disclose this information on time to the credit bureau may impact your credit score without you even knowing about it.