Your Credit Score Will Determine Your Home Loan EMI

You know that your credit score plays an important role in getting a loan. A lower credit score can simply ruin your chances of getting a loan. What you perhaps didn’t know was that a good credit score could get you better interest rates. Although it may already be happening internally, nothing was out in the open. However, that has changed now. 

Recently, Bank of Baroda came out with home loan offering where the interest rate is linked to your credit score. Higher your credit score, lower the interest rate you get. Essentially, you will get a lower spread. MCLR can’t be tinkered because of your credit score. I think it is a logical step forward. Expect other banks to follow suit soon.

What Does Your Credit Score Indicate?

Your credit score is a measure of your creditworthiness. Credit information companies like CIBIL compile such scores based on repayment record and a few other parameters. CIBIL score ranges between 300 and 900. Higher is better. CIBIL is not the only credit information company (CIC) around. There are a few others such as Experian and Equifax but CIBIL is the oldest and the most popular.

How CIBIL Score Affect Bank of Baroda Home Loan Interest Rates?

Depending upon your credit score, your home loan interest rate will vary from 8.35% p.a. to 9.35% p.a. At BoB, the home loans are linked to 1-year MCLR. Currently, 1-year MCLR for Bank of Baroda is 8.35% p.a.  Therefore, your spread over MCLR will vary from 0 to 100 bps depending upon your credit score. 

  • Those with CIBIL score of 760 or above will be offered home loan at zero spread i.e. such borrowers will be offered loan at MCLR. Hence, if you have a CIBIL score in excess of 760, you can get a home loan at as low at 8.35% p.a. Do note that CIBIL (or credit score) is just one of the parameters considered during loan sanction process. You repayment ability is extremely important.
  • If your credit score is between 725 and 759, you will get loan at 1-year MCLR + spread of 50bps. At current 1-year MCLR of 8.35%, you will get home loan at 8.85%.
  • If your credit score is below 724, you will get home loan at 1-year MCLR + spread of 100 bps i.e. you will get home loan at 9.35% p.a.
  • Borrowers with inadequate credit history will be charged a spread of 50 bps i.e. such borrowers will get loan at 8.85% p.a.

The interest rates are independent of loan tenure and amount.

Do note the policy is bank specific. For other banks, your credit score may just be a criterion to decide whether loan should be sanctioned to you. Your credit score may not play a role in deciding the spread (or the interest rate). Bank of Baroda has just gone a step further and openly so. Moreover, do not expect that other banks will offer loans at zero spread if your credit score is very high (even if credit score is determinant of spread as per bank credit policy). The policy will vary across banks.

CIBIL ScoreInterest RateInterest Rate (1- year MCLR: 8.35% p.a.)EMI on Rs 50 lac loan for 20 years
7601-year MCLR + Spread of 0 bps8.35%                        42,918
724-7591-year MCLR + Spread of 50 bps8.85%                        44,505
<7241-year MCLR + Spread of 100 bps9.35%                        46,118
Limited Credit history1-year MCLR + Spread of 50 bps8.85%                       44,505

How Does This Impact You?

Let’s limit ourselves to the above tabulation. For a loan of Rs 50 lacs for 20 years, your loan EMI at 9.35% exceeds EMI for 8.35% p.a. loan by Rs 3,200. Over a loan term of 20 years, this will translate to interest saving of Rs 7.68 lacs. This is quite significant. This will also ease pressure on your monthly cash flows. At 8.85% p.a., your home loan EMI will be Rs 1,587 higher. Over 20 years, you pay Rs 3.8 lacs more in terms of interest payout.

What Should You Do?

Kind of a no-brainer. If you are planning to apply for a home loan, do check your credit score before applying.  And you don’t even have to pay for it. RBI, in its circular dated September 1, 2016, has directed all credit information companies to share 1 free full credit report (FFCR) per calendar year (January 1- December 31). Make full use of the facility. View your free credit report online. If you notice any discrepancies, get those sorted out at the earliest. If you find that the credit score is genuinely low, you should take steps to improve your credit behaviour. If you do not have adequate credit history, try to build one by taking a credit card.

Further Reading

  1. Economic Times: Your credit score will determine how much home loan EMI you will pay
  2. LiveMint: Bank of Baroda offers home loans at 8.35%, cheaper than SBI rates


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