Work actively on improving your credit score to protect your home loan rate

Banks expect the stress in their loan books to rise and hence want to provision for the increased risk by charging a higher risk premium
Bank of Baroda (BoB) recently hiked the credit risk premium it charges its home loan customers (the risk premium is added to the external benchmark rate to arrive at the home loan rate). It also made its credit score criteria more stringent. State Bank of India, the country’s largest lender, had hiked its risk premium in May. The gains that accrue to a home loan borrower due to a decline in the repo rate get offset, to some extent, when there is an increase in the risk premium.  

BoB’s best rate has risen from 6.85 per cent to 7 per cent due to the hike in risk premium. The credit score needed to avail of this rate has risen from 726 and above earlier to 775 and above now. The bank offered four credit score slabs (with linked interest rates) earlier. That number has now increased to five. The risk premium range —the difference between what customers in the top and the bottom credit score slab pay—was 100 bps earlier but has now increased to 135 bps.

Banks expect the stress in their loan books to rise and hence want to provision for the increased risk by charging a higher risk premium. “Given the uncertainty surrounding the income and financial stability of borrowers and the risk-aversion among banks, the latter are leveraging the credit score to reduce their credit risk,” says Adhil Shetty, chief executive officer, Bankbazaar. He believes other banks may also follow suit while reviewing their lending rates. And while the higher risk premium currently applies to new borrowers only, Shetty believes that if a customer’s credit assessment undergoes a substantial change, the credit risk premium associated with his loan could also be revised.

As for BoB making credit score standards stiffer, Arun Ramamurthy, a Mumbai-based credit advisory expert and author, says: “The idea is to cherry-pick better-quality borrowers.”

Many customers who had applied to BoB for a new loan or to refinance an old one could not get their loans sanctioned before its rates went up. “Those who have not yet paid a processing fee or got a sanction letter should try other players from whom they could get a rate slightly below 7 per cent,” says Aditya Mishra, Aditya Mishra, founder and chief executive officer, SwitchMe, a digital home loan broker. He also emphasises the need to act fast.  

Overall, however, this remains a good time for taking a home loan. “Interest rates have fallen from around 8 per cent one-and-a-half years ago to around 7 per cent now. Against this backdrop, even if a bank does risk-based pricing, you are still getting a good rate,” says Ramamurthy. He believes that since lenders are flushed with liquidity, face high competitive pressures, and need to build their retail loan books, they may not risk hiking their risk premiums much.  

The bottom line is that while a good credit score was always an asset, it has become even more crucial in the current scenario. So, do your best to maintain or improve it (see table).

Tips for maintaining a good credit score

· Do not miss out on EMI or credit card repayments
· Do not exceed 40-50 per cent of the spending limit on your credit card
· Maintain a mix of secured and unsecured loans and avoid overdependence on the latter
· Closing old accounts, like a credit card that you have used for 10-15 years, can adversely affect your score
· Do not apply to 10-15 banks when you need a loan. Too many hard enquiries in succession affect your score
· Now that the moratorium has ended, start repaying your EMI unless your loan gets restructured

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