A healthy credit score is crucial not only at the time of applying for a home loan but also during the entire repayment period. Home loan interest rates are at the lowest now, but the same can vary depending on gender, loan to value (LTV) and the borrower’s credit score.
While other factors typically don’t impact the loan interest rate during the loan period (assuming the bank’s interest rate is unchanged), a change in the credit score may result in a difference in the interest rate on your home loan during the loan period as well.
Calculation Of Your Interest Rate
The credit score impact usually varies from bank to bank. Every bank has its own defined range for the credit score within which the interest rate varies. For example, if your credit score is above 800 and your home loan amount is below Rs 30 lakh, the bank may charge you an interest of 6.70% pa, and if the amount is above Rs 1 crore, the same bank may charge you interest of 7.50% pa.
So, the interest rate may vary depending on the home loan amount at a certain credit score range. Typically, the interest rate on home loans increases with a fall in the credit score, or vice-versa. To know how interest rate varies with different credit score range check the table mentioned below:
Impact of Poor Credit Score On Existing Borrowers
A decline in your credit score when you have already borrowed a home loan could increase the interest rates. For example, suppose at the time of taking the loan, your credit score was 800, and the interest rate offered to you was 6.7% pa. Later, the credit score dropped to 700 during the loan period, so the interest rate on your loan will increase to 7%, i.e., as per your new credit score range.
According to the Reserve Bank of India (RBI), “Banks are free to decide the spread over the external benchmark. However, credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.”
The banks review the borrower’s credit score at least once a year and adjust the borrower’s interest rate accordingly. If the credit score drops during the bank’s review, the applicable rate of interest on the loan may go up, and if the score increases, the interest rate may get revised to a lower level. Some banks might increase the interest rates only when there is a drop of 50 basis points or more in the borrower’s credit score. The golden rule is to maintain a good credit score before applying for a home loan and during the entire repayment period to avoid any hike in the interest rate.
(The author is CEO, Bankbazaar.com)