How Credit Score affects your Home Loan Interest Rates?

You must has know now what Credit Score is? Now, lets check out how do it affects your Home loan EMI.

Assume you and your friend is having same salary, both of you have loans and pay monthly installments on time but say you have borrowed 5 X amount than your friend, so even if you are paying all installments timely, your credit score tends to be lower than that of your friend due to excessive borrowings which will lead to higher rate of interest on your home loan and this is because of Risk based pricing.

 Risk based pricing

Reserve bank of India w.e.f 1st Oct 2019 has allowed banks to charge Credit risk premium for calculating effective interest rate which makes credit score an important factor in determining the interest on loans.

Risk based pricing system depends on customers credit score and offer credit rate according to it. Banks now divide customers on the basis of their risk profiles.

Lets say you have higher borrowing and you apply for a loan then being higher probability of your loan being defaulted, you will now be charged an additional premium on interest rates due to high credit risk.

With Credit score lower than 759 higher interest rate on home loan is charged against borrowers with credit score more than 760.

The process now has been adopted by major banks including BOB, Union Bank, Syndicate bank, SBI etc.

There are using CIBIL Score from Credit information bureau to price home loans.

Indicative example

Working in Bank of Baroda one of their employee told us “Customers with Credit Score more than 760 will have interest rates 8.10% on home loans, those who are having credit score in between 725-759 would have to pay 8.35% on home loans and 9.1% would be charged to those having Credit score in between 675-724.

State bank of India has categorized borrowers into six risk grades in between 1 – 6 for salaried and non-salaried persons.

Simple Chart for easy understanding

 

Bank of Baroda
Credit ScoreIntt Rate
>7608.10%
725-7598.35%
675-7249.10%
Union Bank of India
Upto 75 Lakh
Credit ScoreIntt Rate
>7008.45%
<7008.55%
More than 75 Lakh
Credit ScoreIntt Rate
>7008.50%
<7008.60%

 

State Bank of India
Upto 30 Lakh
Risk GradeIntt Rate
1 to 38.20%
4 to 68.30%
30-75 Lakh
Risk GradeIntt Rate
1 to 38.45%
4 to 68.55%
More than 75 Lakh
Risk GradeIntt Rate
1 to 38.55%
4 to 68.65%

 

Factors affecting your credit score

  • Default in paying your installments.

  • Having multiple credit card

  • Personal loan

These factors shows your credit greediness and reduces your credit score.

By improving your credit score if you can even save 1% in your interest it can values to Lakh of rupees in long term.

Lets say you have a home loan of Rs. 1 Crore for 20 years at interest rate of 9.5%, your monthly installment will come to Rs. 93210/- per month.

But in the same case if you have loan at interest rate of 8.5% your monthly installment would come down to Rs. 86,780/- per month. So there is a saving of around Rs. 6400 per month and for 10 year tenure you can save Rs. 10 Lakh approx.

So maintain your credit score wisely as you can save a lots of money by taking your borrowing decisions wisely.

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Vikas Vats
Vikas Vats
September 15, 2020 10:20 pm

Which Bank can be considered for getting lowest interest rates on Home Loans ?

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