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A higher credit score may now get you a cheaper loan. Credit information bureau Transunion Cibil has announced that Bank of India will be offering preferential pricing to home loan borrowers with a Cibil score of 760 or above.

Those borrowing Rs30 lakh or above with a credit score of 760 or more will get a loan rate that will be 10 basis points (bps) cheaper than the rates on offer for those with a lower credit score. Borrowers with a high score will get the 1-year marginal cost of funds-based lending rate (MCLR), whilethose with a lower score will pay a rate that is higher by 10 bps. MCLR is the minimum rate that the bank can offer for its loans. One bps is one-hundredth of a percentage point.

For a Rs30 lakh loan for a period of 20 years at 8.5%, your EMI per Rs1 lakh is Rs867. This comes down to Rs861 when the rate of interest is reduced by 10 bps. The EMI will come down from Rs26,035 to Rs25,845, a change of Rs190 (see graph).

Hrushikesh Mehta, Cibil’s head of Direct to Consumers Interactive, said that banks have started rewarding customers with a good credit score. “Bank of Baroda started a similar offering in 2017, which is still going on and IDBI Bank took similar steps after that," he said.

In January 2017, Bank of Baroda started offering home loans at MCLR to customers with a credit score of 760 or above. It had also allowed those on base rate to convert to MCLR-based rate free of cost.

Bank of India offer

The Cibil announcement quoted Bank of India as saying that consumers with good credit discipline should be rewarded. The Bank of India website states that till 30 June 2018, borrowers of up to Rs30 lakh under the bank’s Star Home Loan scheme will get the loan at MCLR. A classification by credit score has not been specified for loans up to Rs30 lakh. For loans above Rs30 lakh, consumers with a Cibil score of 760 and above, will get the loan at MCLR, while those with a lower score will get the loan at MCLR plus 10 bps.

Bank of India did not respond to Mint’s request for clarifications on whether it will also consider credit scores from other credit bureaus or if customers with older base rate-based home loans can avail this offer.

What you should do

Even though most banks promote their home loans by highlighting their MCLR, in most cases, the final rate that customers get is MCLR plus spread.

Deepali Sen, a certified financial planner and founder of Srujan Financial Advisers LLP, said that credit score is a deciding factor for these and in most cases there will be a mark-up of 15-20 bps over MCLR. “In our experience, only the newer banks are actually giving the loans at MCLR, but their MCLR is slightly higher than the older and larger banks," she said.

A 20 bps difference on home loan could mean a significant impact, she said. “But people also take into account how smooth the process of a particular bank is. What one should also look at is the track record of a bank when it comes to transmission of rate cuts and revised MCLR from time to time," she said.

A good score has started paying back in the form of a lower rates. But before going for a home loan, also take into consideration the track record of the bank in transmission of rates and convenience. Those who don’t need a loan right now should keep track of their credit score as that could reward them in the future.

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