Why Home Buyers May Not Get Cheap Interest Rates on Home Loans
It’s hard to miss the ads from banks shouting very low interest rates on home loans in the middle of the holiday season.
The State Bank of India (SBI) grants home loans at 6.70% with no cap on the loan amount. Kotak Mahindra Bank, Bank of Baroda and Deutsche Bank offer the lowest rates among all banks and housing finance companies, starting at 6.50%. The rates of other big banks such as Yes Bank and ICICI Bank are starting at 6.70%, while Punjab National Bank (PNB) gives at 6.60%. However, these attractive interest rates are not for everyone. Small factors like the source of your income, whether or not you have a savings account with the lender, and the amount of the loan increase the final interest rate (ROI).
More importantly, the shift from variable rate loans to external benchmarking has made the credit rating a crucial factor in determining the effective rate of the loan. “A substantial weight is given to the credit rating when determining your interest rate,” said Abhishikta Munjal, chief risk officer, IIFL Home Finance. HT-Mint tells you the key factors that can increase interest rates on home loans.
Decreased credit rating
Banks charge a credit risk premium higher than the external benchmark rate depending on the credit rating of the loan applicant. A high credit score of 750 and above can earn you 10-100 basis points (bps) off the interest rate. 1 bps is equal to 1 / 100th of a percentage.
For example, Kotak Mahindra Bank’s lowest rate at 6.50% is for borrowers with a credit rating of 800 and above. The interest rates for the 750-799, 700-749 and 650-699 credit score bands are 6.60%, 6.80% and 7.10% respectively.
Here’s an example to put a seemingly small rate hike of 50bp into perspective. A higher rate of 50bps for a ??A loan of 40 lakh taken out over 20 years will increase the interest component of ??2.87 lakh. Most banks don’t lend to borrowers with a Cibil score below 650. A good credit score is important not only when getting the loan, but throughout its life, according to Adhil Shetty, CEO of Bankbazaar.
“The RBI has asked the banks that the deviation from the benchmark rate, which is entirely at the discretion of the banks at the time of granting the loan, should remain unchanged throughout the life of the loan, unless the A borrower’s credit rating does undergo a major change. This would mean that banks not only have to tie the borrower’s interest rate to their credit score, but they can also change the ROI following a large change in the borrower’s Cibil score. “
Small print matters
The effective interest rate largely depends on the profile of the borrower. “The source of income, the company in which the borrower is employed, the sector in which it is associated, its qualification, the age of the borrower and the length of the job or company are factors that influence the buyer’s interest rate, ”Munjal said. In addition to the profile of the borrower, the nature of the property also affects the final rate. “The lender may charge a lower rate if the property is purchased from a reputable builder,” said Ashish Jain, managing director of Star HFL.
A borrower’s existing loans and IMEs also affect the final rate, said Raj Khosla, founder and CEO of MyMoneyMantra.com. “Typically, lenders assess borrowers’ repayment capacity based on their current fixed bond-to-income ratio (FOIR). Ideally, FOIR should be less than 40-50% of net income. A higher percentage of FOIR reflects a higher credit risk, resulting in a higher return on investment for a home loan, ”he said.