Home loan interest rates are currently at the lowest level, but can vary depending on the gender, loan to value (LTV) and credit score of the borrower.
Credit Score: When you apply for a loan from a bank or any financial institution, apart from your age, income, and profession, your credit score is also taken into consideration. If the credit score is low, then either the loan application may be rejected or even if the loan is passed, you may have to pay more interest. Credit scores are extremely important not only while applying for a home loan but also throughout the repayment tenure. Home loan interest rates are currently at the lowest level, but can vary depending on the gender, loan to value (LTV) and credit score of the borrower. The interest rate on your home loan may vary during the loan tenure due to change in credit score.
How is interest rate calculated?
The impact of credit score generally varies from bank to bank. Each bank has its own method regarding credit score, due to which interest rates vary. For example, if your credit score is above 800 and your home loan amount is less than Rs 30 lakh, the bank may charge you an interest of 6.70% per annum, and if the amount is more than Rs 1 crore, the same bank may charge you an interest of 7.50% p.a.
Hence, the applicable interest rates may vary depending on the home loan amount over a certain credit score range. Generally, the interest rate applicable is higher when the credit score is low or conversely, the interest rate may be lower if the credit score is good. Here we have given a table below, through which you can understand how the interest rate varies with different credit score ranges.
Impact of Bad Credit Score on Existing Borrowers
If you have taken a home loan, a fall in your credit score during this period can lead to higher 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% p.a. Later, if the credit score falls to 700 during the loan tenure, the interest rate on your loan will increase to 7%. That is, it will change according to your new credit score range.
Banks review the credit score of the borrower at least once a year and accordingly adjust the interest rate applicable to the borrower. If the credit score falls during the review of the bank, the interest rate applicable on the loan may increase. Similarly, if the score increases, the interest rate may come down. Some banks may increase interest rates only if there is a fall of 50 basis points or more in the credit score of the borrower. It is important to maintain a good credit score before applying for a home loan and to avoid any increase in the interest rate throughout the repayment tenure.
(The author is CEO, Bankbazaar.com)
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