There has been immense speculation about the benefits of the general public with regard to availing of home loans tied to the credit scores. Experts feel that since home loans are usually for higher amounts and come with longer durations, borrowers should closely examine the interest rate payable instead of only the monthly EMI amount.
Home loans usually make up the biggest slice of debt taken on by any individual in his/her life with average ticket sizes touching Rs. 30 lakh and more and tenors going up to 10-20 years even. The interest that is paid on home loans usually goes up to several lakhs as a result. Borrowers should thus take a look at the rate of interest carefully before opting for credit score linked home loans as opined by experts.
Home loan pricing as linked to credit scores
The credit score tracks the probability of an individual defaulting on his/her loan. The credit score hovers between 300-900 and is generated post consideration of several factors by credit bureaus. These factors include past payment history for loans, credit types and vintage linked with credit usage and utilization of credit. The higher one’s credit score, the lower his/her probability of loan defaults. This means that the bank can offer lower interest rates to such customers. Missing any payment on credit card debt or a loan may lead to a lower credit score as well.
Likewise, in case there is a lengthy credit history for an individual, he/she may have a particular credit score. Higher utilization of credit limits on credit cards may also indicate hunger for credit on the customer’s part, leading to a lower credit score. This is the rationale behind risk-pricing for home loans and helps in demarcating individual borrowers on the basis of their risk profiles while helping them save more money by reducing their costs of interest. A lower rate of even 0.5% may enable lakhs of rupees in savings due to reduced costs of interest. This translates into a major benefit for home loan borrowers as a result.
How has risk-based home loan pricing evolved in India so far?
Banks are now allowed to charge a specific risk premium which is a part of the rate of interest for working out the final interest rate for the home loan. They can change the rates of interest throughout the loan tenor in case the borrower’s credit profile undergoes any change. A few banks such as Union Bank of India, Syndicate Bank, Bank of Baroda and Bank of India will be majorly relying on credit scores of individual borrowers for working out final interest rates. For instance, Bank of Baroda offers 8.1% as the interest rate for customers with CIBIL scores above 760 and 8.35% for those with CIBIL scores between 725-759. The rate of interest is 9.1% for borrowers with CIBIL scores between 675-724.
BoB (Bank of Baroda) will also be revising interest rates in case the borrower’s score comes down. Syndicate Bank will be increasing rates of interest in similar fashion in case the CIBIL score of the borrower comes down by more than 50 basis points.
Tips to keep in mind
You should always check your CIBIL score and credit report way before you apply for your home loan. This will benefit you since in case of a lower score or any other issues on the credit report, you will have ample time to fix the same. You should never submit home loan applications to several financial institutions since a higher number of hard enquiries may reduce your CIBIL score.
You should negotiate comprehensively with your lender for lower interest rates in case you have a good CIBIL score and impeccable credit history and repayment track record. Once you get a home loan, maintain the same properly while looking to enhance your credit score even further. This may eventually lead to a lower rate of interest a few years down the line on your home loan!