Why house buyers may not get cheap interest rates on home loans

 During the holiday season, it's difficult to avoid bank commercials promising rock-bottom interest rates on home loans.

The State Bank of India (SBI) is offering home loans at a rate of 6.70 percent with no maximum loan amount. At 6.50 percent and above, Kotak Mahindra Bank, Bank of Baroda, and Deutsche Bank offer the lowest rates among all banks and housing financing businesses. Other prominent banks, such as Yes Bank and ICICI Bank, provide rates starting at 6.70 percent, while Punjab National Bank (PNB) offers 6.60 percent. These favourable mortgage rates, however, are not for everyone. The ultimate rate of interest (RoI) is pushed upwards by small factors including your source of income, whether you have a savings account with the lender or not, and the loan amount.

Most notably, the move to external benchmarking for floating rate loans has made credit score a critical determinant in setting the effective rate on the loan. "When determining your rate of interest, your credit score is given a significant weighting," said Abhishikta Munjal, chief risk officer, IIFL House Finance. HT-Mint explains the important variables that might hike interest rates on home loans.

Drop in credit score

According to the credit score of the loan application, banks charge a credit risk premium over and above the external benchmark rate. A credit score of 750 or higher can result in a 10-100 basis point (bps) interest rate reduction. 1 basis point is equal to 1/100th of a percentage point.

For example, borrowers with a credit score of 800 or more might get the lowest rate of 6.50 percent from Kotak Mahindra Bank. 750-799, 700-749, and 650-699 credit score bands have interest rates of 6.60 percent, 6.80 percent, and 7.10 percent, respectively.

Here's an example to put a 50-basis-point rate hike in perspective. A 50 basis point increase in the interest rate on a 40 lakh loan over 20 years will increase the interest component by 2.87 lakh. Most banks refuse to lend to borrowers who have a Cibil score of less than 650. According to Adhil Shetty, CEO of Bankbazaar, a good credit score is vital not just when applying for a loan, but throughout the life of the loan.

"The RBI has directed banks that the spread over the benchmark rate, which is entirely at the discretion of the banks at the time of loan issuance, shall remain fixed throughout the loan's life unless the borrower's credit assessment changes significantly." This means that banks must not only link a borrower's interest rate to their credit score, but they can also vary the RoI if the borrower's Cibil score changes significantly."

Fine print matters

The effective interest rate is heavily influenced by the borrower's profile. "The borrower's source of income, the firm with which she is employed, the industry with which she is involved, her qualification, the borrower's age, and the job or business vintage are some of the elements that influence the buyer's rate of interest," Munjal explained. The characteristics of the property, in addition to the borrower's profile, influences the ultimate rate. "If the home is purchased from a reputable function Object() { [native code] }, the lender may charge a lesser rate," said Ashish Jain, managing director of Star HFL.

According to Raj Khosla, founder and CEO of MyMoneyMantra.com, a borrower's existing loans and EMIs have an impact on the ultimate rate. "Lenders estimate borrowers' repayment capacity based on their present fixed commitments to income ratio as a rule of thumb" (FOIR). FOIR should ideally be less than 40-50 percent of net take-home pay. "A greater percentage FOIR indicates a larger credit risk, resulting in a better return on investment (ROI) for a home loan," he explained.

Conclusion

There's no need to be discouraged if your personal loan application is turned down. To boost your chances of loan approval, simply work on improving your credit report and following the methods outlined above. Once you've completed this checklist, you're ready to submit your personal loan application.To find about the best pricing and deals, call our toll-free number +91-9477079053. They'll help you in every way they can. Please contact me at Best Home Loan In India if you have any more.

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