Similar to your physical wellbeing that facilitates you to work harder and in turn earn more money, better credit health will help in bringing down the cost of your property.
The statement that your credit profile will have an effect on the cost of your property may sound like an overstatement, but it is not an exaggeration by any means. Similar to your physical wellbeing that will facilitate you to work harder and in turn will result in success and more money over a longer period, better credit health will help in bringing down the cost of your property. Let us check the validity of this statement.Let us begin with an understanding on what is termed as a good credit profile. Your credit profile is an outcome of your performance on various loans and credit facilities that you were historically granted by any lending institution in India. It is denoted through a three-digit credit score that reflects on your credit bureau report. The score ranges from 300 to 900 in India and a score of 750 and above is deemed to be good.
Now let us understand various elements that will impact the cost of the property that you wish to buy.
1. Cost of property that you are required to pay the seller
2. Registration cost
3. Interest on loan
4. Processing fee charged on the loan
5. Renovation cost
6. Insurance cost
Let us now see how a better credit profile will help in lowering the cost of your property.
Rate of interest
The loan to buy property is definitely a large ticket obligation that runs over a long period. Generally, the home loan gets disbursed for a term of 20 years. So if you are taking a loan of 1 crore, a difference of 1% can lower the cost of your loan by Rs 15 lakh. The interest that you are paying on the loan is nothing but an addition to the cost of the property. A saving of 15 lakh on the interest component is a clear saving.
Another fact that needs to be considered is that while the home loans get disbursed for 20 years, these get paid off in 10 years on an average. The larger part of the EMI being paid in initial years gets accrued towards the interest rate. Which means that if you close the loan in 10 years the cost of funds will be even higher. A lower rate of interest will help in keeping this under check.
Processing fee is a constant charge across all housing finance companies. A better credit profile can help you in getting better terms on this fixed component. While the amount of saving will be a few thousand, but at the end of the day money saved is money earned.
A house is something very personal and there are a lot of reasons why you or anyone else will zero down on a particular property. The area of the house, location, vicinity, neighborhood, facilities close to house so on and so forth apart from appeal to all family members. It goes without saying that selection of a house calls for a lot of time and effort. Once the house is selected and advance given to the current owner, you would apply for a loan. You have been very confident on approval of the loan. But beware, your credit profile may have been under stress for errors as well. Studies show that one of four reports have errors that can lead to impairment of credit profile. So you apply for the loan and it gets rejected. You would be wondering as to what could be the reason? You have never defaulted and have adequate income to service the loan. Still, purchase of the house would seem to be a distant dream.
The rejection will not only lead to you losing the advance paid to the seller but also the processing fee etc. The time that you take to get your credit profile improved (you must know that it may take anything from a few months to over a year to improve the credit profile) and get an approval, the cost of properties may have experienced an inflation. This will clearly increase the cost of your purchase. So, if your credit profile is good, you may be able to purchase the property at a better cost.
One generally tends to take a loan for renovation and registration as well. So if you are getting a loan at a better rate of interest due to a good credit profile, it will lead to saving in the overall cost of property.
As we see, a good credit profile will impact most of the elements that impact the overall cost of property. Thus, it is advisable to maintain your credit profile and keep checking it at least once a year.
(By Arun Ramamurthy, Director & Co-Founder, Credit Sudhaar)