While your credit score is an essential determinant of your home loan interest rates, there are other factors taken into consideration as well by financiers.
A credit score is one of the primary determinants of home loan interest rates. Although home loans are secured credit facilities and the eligibility criteria do not rest explicitly on the credit score, it is nonetheless essential. When you apply for a home loan, the lender assesses your credit score to determine your credibility as a borrower and decide the loan terms according to it.
There are several credit bureaus in India which rate individuals based on multiple parameters or attributes essential to a borrower. One of the most regarded of these bureaus is Credit Information Bureau Limited (CIBIL) which was incorporated in 2000. It is the first institution in India to formally introduce the concept of credit score. Over the years, this parameter has become quintessential to financers when advancing a loan.Quick overview of home loan interest rates and CIBIL
- Current home loan rates in India range from 8% - 16%.
- 220 million – Number of credit-eligible individuals in India, as gauged by the CIBIL.
- 14 million to 16 million – Expected increase in the number of credit eligible individuals every year.While your credit score is an essential determinant of your home loan interest rates, there are other factors taken into consideration as well by financiers.
Variables which affect the interest rates on your home loan
Factors that impact your home loan interest rates include –
• Down Payment
The initial payment which you need to make when availing a home loan is a down payment. The down payment you can make is a major determinant for the applicable interest rate on your home loan. Down payment and interest rates are inversely proportional, i.e. a lower down payment ascertains a higher interest rate. It is because financiers have to bear a higher risk on account of paying a larger proportion of the property value.
• Income Stability
Your income stability is an essential factor in the determination of home loan interest rates. The financer would base your repayment capacity on it. An inconsistent income curve, which can either be due to disparate revenue generation from your business or frequent employment changes, would affect the interest rates on your home loan.
• Interest Rate Type
There are two types of interest rates – floating and fixed. Floating rates vary during repayment tenor based on market conditions. Fixed rates, as the name suggests, remain constant throughout the tenor. In most cases, floating rates on home loans are lower than fixed interest rates. However, both the rates have their respective advantages and disadvantages. You can choose between a fixed and floating rate based on your convenience.
• Property Location
Interest rates also depend on the location of the property which you will purchase using a home loan. In case your property is located in a remote area, the financer may levy a higher interest rate and vice versa. It is because a convenient location would enable the lender to liquidate the property without much hassle in the event you are unable to repay your loan; whereas property in a remote location would be more difficult to liquidate increasing their cost. To account for that spread, financial institutions levy a higher interest rate.These are the factors which you should consider when availing a home loan.
Factors which Affect Credit Score
The most significant variables which affect your credit score are –
1. Repayment History – Your repayment history represents your consistency regarding payment of credit dues. These dues include EMIs for existing or past loans you have availed and your credit card bills.
2. Credit Mix – Your credit score is also computed based on your credit portfolio. If you have a healthy mix of secured and unsecured credit facilities on account of which you make consistent repayments, it represents your sound manageable quality and vice versa.
3. Credit Utilisation Ratio – It is the percentage of utilisation of your eligible limit on your credit card. In case you exhaust your limit or use more than 30% of such limit regularly, it represents you as a credit hungry individual and consequently affects your credit score.
Even though credit score does not significantly affect your home loan eligibility, it acquires considerable weight in the determination of interest rates. Therefore, you should know what the best credit score for a home loan is and how to improve yours.
Maintain a high score and refer to a leading lender for the most beneficial loan terms if you are a prospective borrower. If you are an existing borrower, simply repay your loan as per the EMIs and try to add prepayment as well.