Why can't you get a home loan at 7.1% interest, but your neighbour can?

Most home loans in India are pegged to the External Benchmark Lending Rate (EBLR). Banks determine interest rate for a home loan borrower based on this external benchmark (RBI’s repo rate) plus a spread. The spread component is charged considering the borrower’s credit profile and this is why your neighbour with a better profile (measured typically in terms of credit score) may secure a home loan at the lowest possible interest rate of say 7.1% but you cannot.

Credit score is a 3-digit number computed by authorised Credit Information companies, including CIBIL, Experian and TransUnion among others. The score aids banks in ascertaining your creditworthiness, and hence determine your eligibility for loan, interest rates, and approval chances.

For securing a home loan at the lowest possible rate, you need to have an excellent CIBIL score in the range of 780-850. Those with credit scores below 700 usually end up getting loans at a 0.5-1.5% higher rate of interest.

Currently, Bank of India offers the lowest rate of 7.1% on home loan to borrowers with a CIBIL score of 840 and more.

Income stream and stability: Those with stable employment (such as government employees, doctors etc.) are able to secure home loans at a lower rate as against frequent job hoppers or self-employed individuals.

Loan-to-value ratio: Loans with a higher down payment carry lesser risk and hence attract a lower rate of interest.

Tenure: Loan tenures with a shorter repayment term come with a lower rate of interest.

Property type as well as location: Type of the property as well as the location also play an integral role in determining the rate of interest. For instance, properties pre-approved by banks in prime locations or ready-to-move-in apartments carry lower rates when compared to under construction homes in remote localities.

Debt-to-income ratio: Financial institutions also factor in your debt-to-income ratio when deciding the interest rate on home loans. Individuals with a higher debt burden get home loans at a higher rate and vice-versa.

For building a decent to excellent credit score, you need to abide by the below rules religiously.

1. Remember to pay all the dues on time: For upgrading your credit score, you need to pay all EMIs timely without any missed payments. Also, credit card bills have to be cleared fully ( not just the minimum amount due) before the payment due date.
2. Credit utilisation ratio to be kept at 30%: Do not overuse your credit card limit. Say if your credit card limit stands at ₹1 lakh, utilise less than ₹30,000 per month or less.
3. Maintain a healthy credit mix: Keep a mix of secured and unsecured loans in your portfolio. In a case, if you do not have credit history, start by maintaining a credit card.
4. Do not close your old loan accounts: This is as older loan accounts mean a longer credit history, which consequently translates into better credit scores.
5. Review your credit report quarterly and check for errors: You need to obtain the Cibil report and check for possible errors such as closed loans still showing as active, or accounts that reflect in it even when you did not open them.
6. Get your credit limit enhanced: After responsible repayment track record, you can request for an increase in credit limit. This is as a higher limit would then translate to a lesser utilisation ratio even if you continue to spend a similar amount.

In conclusion, if you adhere to these rules and observe diligent financial behaviour, your credit score will improve over time, thereby increasing your chances of getting a home loan at the lowest possible rate.