TransUnion CIBIL is a credit information company, responsible for assigning individuals a score based on their creditworthiness. In January 2020, 60% of CIBIL score-assigned individuals were eligible to avail loans, with scores exceeding 775.
- However, due to a change in its assessment technique, the number of creditworthy individuals reduced to 37% only by May 2020.
It is essential to note here that credit score can weigh significantly during home loan interest rate determination. Moreover, it can play a crucial role in deciding whether a potential borrower is eligible for the amount which he/she requires. Now, while secured financing reduces a lender’s reliance on credit rating in determining a borrower’s eligibility, it still remains integral to the determination of the risk involved in lending, thus impacting the lending rate.
The impact of credit score on home loans
A home loan is a secured credit, wherein the property one purchases acts as underlying collateral. Thus, HFCs face limited risk when lending money to individuals for house purchase when compared to loans without collateral.
Still, one’s creditworthiness can enable lenders to assess the risk associated with a borrower in terms of repayment capacity, credit dependency, and such other critical parameters reflected through the credit score. With such risk assessment, financial institutions may quote the final home loan interest rate to a particular individual.
For example, a borrower with a credit score of 700 may acquire a housing loan at 9% per annum, while another applicant with a score of 800 may acquire a similar principal at 8.5%. Thus, maintaining a proper CIBIL score for home loans is still important, especially when one is looking to take advantage of the lowest rates.
Tips to improve CIBIL score before a home loan application
If a borrower’s credit rating is below 750, which is an ideally accepted score, he/she can work to improve the same before submitting a home loan application. The following tips can help individuals build their creditworthiness in the long run –
- Repay existing dues in time
The simplest way to improve your chances of acquiring low home loan interest rates is to clear all existing debts on schedule. Thus, servicing EMIs in time and without fail is important. So is clearing credit card bills at the end of each month. Doing so consistently leads to an improvement in CIBIL ratings over the time.
- Limit credit utilisation
Credit utilisation is the amount of funds you utilise from your total sanctioned credit. For example, if your credit card limit is Rs.1 lakh and your card expenses amount to Rs.80,000, the credit utilisation ratio is 80%.
To maintain a stellar credit record, one should maintain this ratio within 30%. Otherwise, it may indicate an unnecessary dependency on credit tools, increasing the overall lending risk.
- Avoid delinquencies
Since credit rating is among the factors that impact one’s home loan interest rate, defaulting on existing dues should be avoided at all costs. Presently, CIBIL looks at an extended period as against such period considered earlier when determining creditworthiness.
- Previously, the Credit Information Bureau (India) Limited considered the last 24 months when determining an individual’s credit rating.
- However, at present, the agency studies the credit history of the last 36 months before rating an individual.
A loan EMI calculator can help plan EMI payments for loans. Such a tool can be essential in preventing delinquencies, thereby helping maintain or improve one’s CIBIL score.
If all else fails, one can always resort to home loans with a co-borrower whose credit ratings are higher. Still, one should assess how his/her credit score gets affected when applying for a joint home loan.
Credit score and its effect on home loan tax benefits
While the influence of credit scores on home loan interest rates is evident, borrowers may miss how CIBIL can affect the amount of taxes they end up paying. Under Section 24B of the Income Tax Act, home loan borrowers can claim yearly benefits of up Rs.2 lakh on housing loan interest payment.
Therefore, as per home loan tax benefit, individuals do not need to bear any taxes if the interest liability is limited to Rs.2 lakh in a year. However, poor credit scores may result in higher annual interest payments than this tax-free slab. In such a case, the additional amount is added to one’s taxable income if it exceeds the Rs.2 lakh-mark.
For example, if your home loan interest payment in a year was Rs.2.50 lakh, the additional Rs.50,000 would be added to your regular taxable income. Improved credit score can prevent such a thing from happening, thereby minimising your tax liabilities.
Individuals with impressive credit history can also take advantage of other facilities, such as pre-sanctioned offers.
These pre-approved offers provided by reputed lenders simplify and streamline the lending process for a range of financial products, including home loans, loans against property, and several other financial products. Individuals can check their pre-approved offers by submitting a few essential details, such as their names and contact details.
Borrowers can also follow other methods to reduce home loan interest outgo. For instance, minimising the loan principal is one of the easiest ways to reduce interest liabilities on such a credit.