How does your Credit Score Determine your Home Loan Interest Rates
A Home Loan is a long-term loan with tenures ranging from 15 to 30 years. So, it is in the borrowers’ interest to keep their Home Loan interest rates as low as possible. But the Home Loan interest rates you get have a correlation with your credit score. Let’s understand how your credit score affects your Home Loan interest rate.
What is a Credit Score?
A credit score is a three-digit number. It is generated by an algorithm using the information in your credit history. In India, CIBIL is the primary credit information company. Banks and non-banking financial companies (NBFCs) use information from CIBIL.
Why do Banks and NBFCs Need your Credit Score to Grant you a Home Loan?
Banks and NBFCs look at your credit score before sanctioning your Home Loan. Your credit score reflects your borrowing and repayment habits. So, banks and NBFCs consider it an important factor when they view your loan application. A low credit score reflects poor repayment habits. Lenders would not want to sanction loans to such an applicant. Your credit score provides a measure of how risky a borrower you might be. Lenders prefer to avoid taking on risky loan applicants.
What is a Good Credit Score for Banks to Sanction your Home Loan?
The credit score, in general, ranges between 300 and 900. For Home Loans, it is good for your score to be closer to 900. This improves your chances of getting approval for your loan application. A CIBIL score above 750 is good. Below 350 is a poor CIBIL score. Meanwhile, 350 to 750 are average scores. The CIBIL website offers some statistics about loan applications. It says 79% of loan applicants with a credit score of above 750 got their loans from the banks or NBFCs.
Does your Credit Score Always Affect your Home Loan Interest Rate?
A good credit score always had another benefit. It helps reduce Home Loan interest rates. A high credit score reflects good repayment history. It indicates that you are disciplined and regular with your debt repayments. So, lenders are willing to sanction loans to such individuals. If you have a good credit score, lenders may also be willing to reduce their Home Loan interest rates. Loan applicants can negotiate with their lenders for favourable interest rates. To get a good deal, you need to have a good credit score.
How will Credit Scores Affect Home Loan Interest Rates Now?
Some banks are already linking customers’ credit scores directly to Home Loan interest rates. Other banks and NBFCs may soon follow suit. At the outset, banks will refer to information from CIBIL. Thus, your credit score will now determine your Home Loan interest rate and the EMI you pay. This type of EMI is called a dynamic EMI.
More about Dynamic EMIs
Borrowers with credit scores ranging from 725 to 759 points may have to pay a lower interest rate. This may be around 8.85% with some lenders. Those with credit scores below 724 may have to pay a higher interest. First-time borrowers, who do not have any credit records yet, will pay the lower interest rate. So, when you calculate your Home Loan EMIs, keep your credit score available with you.
Why is it ‘Dynamic’?
Here, borrowers can improve their credit scores to reduce their Home Loan EMIs. Do you have an average or even a poor credit score? Then you can take steps to improve it. Any improvement will reflect on your interest rate and EMI. For example, say you have a credit score of 720. You will pay 9.35% as interest. But, it makes sense to improve your credit score to at least 725 points. Then your interest rates reduce to 8.85%. Thus, your EMIs reduce as well.
With dynamic EMIs, it is up to the borrower to improve their credit scores. They can then enjoy the benefits of a reduced interest rate.
Having a good credit score has another benefit. You can then do a balance transfer on your Home Loan to a lender that uses dynamic EMIs.
How will the Home Loan market fare once the credit score is directly linked to Home Loan interest rates? It is always a good practice to maintain good credit scores and credit history. It offers a lot of advantages. You should make the most of it.