Applying for a home loan? You will naturally be concerned about the interest rate that you will have to pay. While it is always recommended that you compare interest rates offered by different banks before coming to a final decision, you should also know that rates of interest are affected by several factors. The credit score is one of the primary aspects which influence the final rate of interest on any home loan. Home loans are secured loans and while the eligibility criteria do not officially include the credit score, it is a vital component anyway.
Whenever you will apply for a home loan, the financial institution will be checking and verifying your credit score for establishing your creditworthiness as a borrower. The terms and conditions of the loan will be worked out upon the basis of the same. There are various credit bureaus in the country which rate people on the basis of several parameters and attributes. These include the CIBIL score which is computed by the Credit Information Bureau Limited or CIBIL and was incorporated in the year 2000. This is the first Indian institution to officially bring the credit score concept to the country. This score has now become vital for sanctioning loans in almost all segments.
Factors impacting home loan interest rates
There are several factors which may affect the interest rates on home loans. These include the following:
- Down Payment- The initial payment made for obtaining a home loan is called the down payment. The down payment made by you can be a major determinant when it comes to the interest rates on the home loan. A lower down payment may equate to a higher rate of interest and vice versa. This is because a low down payment means a higher risk borne by the lending institution with regard to paying a bigger chunk of the value of the property.
- Stability of Income- This is another key aspect analyzed by lenders prior to sanctioning a home loan. The stability of income is a vital factor for influencing rates of interest on hoe loans. Your repayment ability will be based upon your income stability. An income graph which is not consistent, either due to fluctuating income from business/self employment or even frequent changes of professional salaried employment will naturally impact rates of interest on the home loan.
- Type of Interest Rate- There are two kinds of rates in the market, namely fixed interest rates and floating interest rates. The latter may vary throughout the tenor for repayment on the basis of market circumstances. The former, as indicated clearly by the name, will remain constant throughout the entire home loan tenor. In most situations, floating interest rates are lower in comparison to fixed rates of interest. Yet, both interest rates come with their own pros and cons. You have to choose on the basis of what suits you best.
- Location of the Property- The rates of interest are also dependent upon the place where your property is situated. In case the property is located in an area which is remote, the lending institution may charge a higher rate of interest and vice versa. This is because a more convenient location enables swifter liquidation of the property by the lender in case the customer does not repay the home loan in a timely manner. A property in a remote area is that much difficult to liquidate in any such scenario. For taking this spread into account, a higher rate of interest is charged by most financial institutions in such cases.
Aspects impacting the credit score
The credit score is also impacted by several factors. These include the following:
- Track record of repayment- The repayment history of a borrower is closely assessed and includes dues repaid as EMIs for past/current loans along with credit card payments.
- Mix of Credit- The credit score is also formulated upon the basis of the credit portfolio of the borrower. In case you have a healthy mixture of unsecured and secured credit and make repayments consistently, it will result in a higher credit score. However, the score will dip in case you have a higher portion of unsecured credit in your portfolio in comparison to secured credit.
- Utilization Ratio for Credit- This indicates the utilization percentage of eligible limits on the borrower’s credit card. In case the limit is exhausted completely or usage exceeds 30% of the credit limit on a regular basis, this will qualify the borrower as being hungry for obtaining credit. Naturally, the credit score will drop as a result.
Along with keeping an eye on the above mentioned factors that influence rates of interest on your home loan, you have to maintain your credit score suitably as well. Make sure that you repay existing dues in a timely manner while attempting to clear off credit card debt and other unsecured loans as swiftly as possible.