While other factors generally don’t impact the loan’s interest rate over the term of the loan, a change in credit rating can also cause the interest rate on your home loan to differ during the term of the loan.
A healthy credit score is crucial not only when applying for a home loan, but also throughout the repayment period. Home loan interest rates are currently at their lowest, but can vary depending on gender, loan to value (LTV), and borrower credit rating.
While other factors generally do not impact the loan’s interest rate over the life of the loan (assuming the bank’s interest rate remains unchanged), a change in credit rating may result in an interest rate difference on your home loan during the period of the loan, as well.
Calculating your interest rate
The impact on credit rating generally varies from bank to bank. Each bank has its own defined range for the credit rating 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 6.70% interest per annum, and if the amount is above Rs 1 crore, the same bank may charge you interest. of 7.50% per year.
Thus, the interest rate may vary depending on the home loan amount within a certain credit score range. Typically, the interest rate on home loans increases with a decline in credit rating, or vice versa. To know how the interest rate varies depending on the credit score range, see the table mentioned below:
Impact of a bad credit rating on existing borrowers
A drop in your credit score when you have already taken out a home loan could increase interest rates. For example, suppose that when you took out the loan, your credit score was 800 and the interest rate you were offered was 6.7% per annum. Later, the credit score fell to 700 during the loan period, so the interest rate on your loan will increase to 7%, which is your new credit score range.
According to the Reserve Bank of India (RBI), “Banks are free to decide on the deviation from the external benchmark. However, the credit risk premium can only undergo a change when the borrower’s credit rating undergoes a substantial change, as agreed in the loan agreement.
Banks review the borrower’s credit score at least once a year and adjust the borrower’s interest rate accordingly. If the credit rating drops during the bank’s review, the interest rate applicable on the loan may increase, and if the rating increases, the interest rate may be revised to a lower level. Some banks may raise interest rates only if the borrower’s credit score drops by 50 basis points or more. The rule of thumb is to maintain a good credit rating before applying for a home loan and throughout the repayment period to avoid any increase in the interest rate.
(The author is CEO, Bankbazaar.com)