Want A Cheaper Home Loan? Improve Your Credit Score

Repeated instructions to pay your equated monthly installments (EMIs) for the personal loan and other such bills on time might sound preachy, but your chances of availing of a home loan increase remarkably if utmost diligence is shown in paying your existing liabilities.

Now, credit score matters a great deal and every slip finds a place in your credit report, based on which banks may or may not lend you credit. For the uninitiated, credit scores are assigned by credit bureaus to borrowers in India, based on the latter’s banking/payment history, on a scale of 300 and 900. Only a score above 700 would ensure a bank willing to lend and even offer a lower rate of interest.

Earlier, maintaining a high credit score was not as incentivising as now. One could get a home loan even with a low score by paying a higher price. With the rising cases of delinquencies, banks are more cautious about lending to buyers with risk exposure. In fact, financial institutions such as Bank of Baroda, Union bank of India and Syndicate Bank have already linking loans to the customers’ risk profile.

Buyers with low credit score found relief at non-banking finance companies and housing finance companies who showed a more liberal approach with regard to risks. However, that option isn’t available now with the Reserve Bank of India (RBI) coming at the helm (these were earlier regulated by the National Housing Bank).

Cost analysis

India’s largest public lender State Bank of India (SBI) has brought its marginal cost of funds-based lending rate (MCLR) to 8.05 per cent. However, applicants with high credit scores are the only ones who would be offered loans without any mark-up.

The same is true of all other banks. Bank of Baroda, for instance, currently offers its MCLR to 8.40 per cent.  However, this rate is available only to those applicants who have a credit score of 760 and above. The charges increase depending on what the bank terms as the risk rating of an applicant.

For applicants having a credit score between 725 and 759, the state-run bank charges an additional mark-up of 50 basis points (bps), bringing  the effective interest rate to 8.90 per cent. Those applicants who have a credit score between 724 are charged 100 bps on top of the existing rate. This differential can appreciate a home buyer’s loan liability by a great margin.

In this scenario, a borrower who gets a Rs 20 lakh loan at 8.40 per cent for 20 years would pay an EMI of Rs 17,230 while the one who is offered a loan at 9.40 per cent, will pay an EMI of Rs 18,512. At the end of the tenure, the latter would pay over RS 3 lakh more towards EMI payment.

How a high credit score places you in a better position

Better bargain: If your score is high, the very start of your relationship with a bank would be on a strong footing, where you would have a greater chance of setting the terms. You could, for instance, convince them to provide you with the loan at a lower rate of interest. This would work wonders as far as saving on the loan amount goes. Most of us are aware that for a large part of a home-loan-repayment tenure, a borrower pays off just the interest. Basically, the burden of interest is much higher than the burden of the principal. Hence, it would be such a great respite, money wise, in case your bank agrees to provide you even half a percentile of waiver.

Since you are in a better position to bargain, you could also ask the bank to relax norms for you when it is setting the terms and conditions. The bank would not charge any fee in case you decide to make certain changes in the nature of services you are availing of. When you switch your loan from your old rate to the new one, there is a certain amount you may have to pay, depending on the rules of a particular bank. A good credit score could get you some relaxation here.

Fringe benefits: Home loans come with a lot of fringe expenses. These include processing fee, legal assistance charges, technical analysis charges, stamp paper cost, franking charges, and taxes. Except for the last three levies mentioned, banks have different rules regarding the other expenses. When you add them all up, these charges may look like an immense bulk, and you could do much better without having to pay them. This is because when you apply for a loan, you often do not factor in these additional charges.  In case you have an impressive credit score, chances are you would be able to convince the bank to lower the fee for you. Whatever is saved in the process is well-earned.

Mistakes that can adversely impact your credit score

While it is a known fact that defaulting on loans is bad for your score, one may not be aware that making repeated, frivolous inquiries about one’s credit would negatively impact your score. The same is true of cheque bounces. Your credit score would also suffer if you have signed as a guarantor for another borrower and they tend to default.

Also, don’t borrow just because you can as it reflects poorly on your credit score. More importantly, having a poor credit score is bad, but having no prior credit history is no good either. Since banks know nothing about you, they would consider you as a risky liability. If you plan to buy a property in the future, it is high time you started taking these matters more seriously and start building your credit history.