Why house buyers may not get cheap interest rates on home loans
- The shift of floating rate loans to external benchmarking has made credit score a crucial factor in determining the effective rate on the loan.
It’s hard to miss advertisements from banks screaming dirt-cheap interest rates on home loans amid the festive season.
State Bank of India (SBI) is giving home loans at 6.70% without any upper ceiling on the loan amount. Kotak Mahindra Bank, Bank of Baroda and Deutsche Bank are offering lowest rates among all banks and housing finance companies at 6.50% onwards. The rates of other large banks such as Yes Bank and ICICI Bank are at 6.70% onwards, while Punjab National Bank (PNB) is giving at 6.60%. However, these attractive interest rates are not for everyone. Small factors like source of your income, whether you have a savings account with the lender or not and the loan size push the final rate of interest (RoI) upwards.
Most importantly, the shift of floating rate loans to external benchmarking has made credit score a crucial factor in determining the effective rate on the loan. “A substantial weightage is accorded to the credit score while deciding your rate of interest,” said Abhishikta Munjal, chief risk officer, IIFL Home Finance. HT-Mint tells you the key factors that can raise interest rates on home loans.
Drop in credit score
Banks charge a credit risk premium over and above the external benchmark rate as per the loan applicant’s credit score. A high credit score of 750 and above can get you a discount of 10-100 basis points (bps) on the interest rate. 1 bps is equivalent of 1/100th of a percentage.
For instance, Kotak Mahindra Bank’s lowest rate of 6.50% is for borrowers with a credit score of 800 and above. Interest rates for credit score bands of 750-799, 700-749 and 650-699 are 6.60%, 6.80% and 7.10%, respectively.
Here’s an example to put a seemingly small rate hike of 50bps in perspective. A 50bps higher rate for a ₹40 lakh loan taken for 20 years will increase the interest component by ₹2.87 lakh. Most banks do not lend to borrowers with a Cibil score below 650. A healthy credit score is important not just at the time of availing the loan, but through its entire course, as per Adhil Shetty, CEO, Bankbazaar.
“RBI has instructed the banks that the spread over the benchmark rate, which is completely at banks’ discretion at the time of issuing the loan, should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a major change. This would mean that banks must not only link the borrower’s interest rate to their credit score, but that they can also alter the RoI following a large change in the borrower’s Cibil score.”
Fine print matters
The effective rate of interest largely depends on the borrower’s profile. “Source of income, the company borrower is employed with, industry she is associated with, her qualification, age of the borrower and job or business vintage are some factors that influence the buyer’s rate of interest,” said Munjal. Apart from the borrower’s profile, the nature of property also affects the final rate. “The lender may charge a lower rate if the property is bought from a renowned builder,” said Ashish Jain, managing director, Star HFL.
A borrower’s existing loans and EMIs also have a bearing on the final rate, said Raj Khosla, founder and MD, MyMoneyMantra.com. “As a rule of thumb, the lenders assess the borrowers’ repayment capacity basis their current fixed obligations to income ratio (FOIR). Ideally, FOIR should be below 40-50% of the net take-home income. Higher percentage FOIR reflects higher credit risk, thereby resulting in a higher RoI for a home loan,” he said.