How a High Credit Score Can Save You Lakhs on Your Home Loan?

Following the Reserve Bank of India’s (RBI) decision to reduce the repo rate by 25 bps to 6.25%, several public sector banks have revised their home loan interest rates. As a result, some banks are now offering repo rate-linked home loans starting at 8.1%.

Credit Score: A Key Factor in Home Loan Interest Rates

Despite the rate cuts, not all borrowers will receive the lowest interest rates. Home loan interest rates are not uniform for everyone; they vary based on the borrower’s credit score.

A credit score is a three-digit numerical representation of a borrower’s credit history. It reflects how well an individual has managed past credit obligations, such as credit card bills, loan repayments, and other financial commitments.

Borrowers with a poor credit history tend to have lower credit scores, which often leads banks to charge them higher interest rates. Conversely, those with excellent credit histories and high credit scores qualify for the lowest available interest rates.

Impact of Credit Score on Home Loan Costs

Banks adjust their home loan interest rates based on credit scores, meaning even a small difference in the score can significantly impact the overall loan burden. A borrower with a credit score of 800 is likely to secure the lowest interest rate, while those with lower scores may have to pay higher rates.

For example, Union Bank of India has set their lowest home loan interest rate at 8.1% for individuals with a credit score of 800 or above. However, if a borrower’s score is 100 points lower (i.e., 700), the applicable interest rate is 8.25%.

Similarly, if a borrower’s credit score is between 700 and 749, the interest rate could be from 8.85% to 9%. This rate keeps getting higher as the credit score keeps decreasing.

Suppose you are taking a home loan of ₹50,00,000 for a tenure of 25 years. If your credit score is 720, then the interest rate could be 8.85%. Using a home loan calculator, you can calculate your monthly EMI. So your monthly home loan EMI will be ₹41,618, and the overall interest amount on your home loan will be ₹74,85,387.

On the other hand, if your credit score is 800, for the same loan amount of ₹50,00,000 for a tenure of 25 years, the interest rate will be 8.1%, meaning your monthly EMI will be ₹38,923, and the overall interest amount on your home loan will be ₹66,76,786.

It’s very clear that having a good credit score can impact your loan interest rates.

Note that the interest rates can vary from bank to bank.

Steps to Improve Credit Score for Better Loan Terms

To secure better home loan interest rates, borrowers should aim to maintain a high credit score by:

• Paying credit card bills and EMIs on time
• Keeping credit utilisation low
• Avoiding multiple loan applications in a short period
• Regularly checking credit reports for errors and rectifying them

Conclusion

By improving their credit scores, borrowers can reduce their loan burden and take full advantage of RBI’s repo rate cut.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.