Repo-linked loans: Your credit score is now key to fix your home loan EMIs

Your repo-linked home loan interest rate will now directly take into account your CIBIL score, a three-digit figure that tells your credit worthiness based on the past credit behaviour of timely payment of loan instalments, delays and defaults.

At least three public sector banks (PSBs), the first off the block to introduce the new repo-linked home loan rates, have clearly specified a higher risk premium of 5 to 10 basis points for a borrower with credit score below 700. A score more than 800 is considered very good, 700-800 is acceptable and anything below 700 is somewhat risky.

Banks always consider the CIBIL score before extending the loan. But, it will now be used upfront to fix the interest rate to be charged over and above the repo-linked benchmark rate. Many banks are likely to come up with their repo-linked benchmark post the monetary policy review this Friday (as there are expectations of another 25 basis points cut in the repo rate) with credit score being the key determinant.

Let's take a look at repo-linked rates of three PSBs where CIBIL score is one of the key elements of overall interest rate to be charged from October 1 this year:

South-based Corporation Bank is offering a standard home loan up to Rs 75 lakh at 8.35 per cent for home loan borrower with credit score of over 700. The interest rate for the same loan will be fixed at 10 basis points higher (8.45 per cent) if the credit score is below 700.

Under the new repo rate regime, the only variable is the repo rate, which Reserve Bank of India reviews by every two months, that is, six times in a year. Other components such as spread over repo remain fixed for three years. The banks may get stuck if other elements such as the operating cost, fixed deposit rates or default undergoes a change for the worse.

Similarly, the Mumbai-based Union Bank of India is charging 8.45 per cent for a loan up to Rs 75 lakh for a good borrower with credit score of over 700. The overall interest rate goes up to 8.55 per cent if the credit score is below 700.

The Delhi-based Oriental Bank of Commerce has come out with three different variants of home loan with credit bureau score as the key determinant. The bank offers 8.35 per cent interest rate for a credit score of over 800. The overall interest rate goes up to 8.40 per cent for borrower with credit score between 701 and 800. The rate is 8.45 per cent for those with credit score below 700.

There could be more slicing and dicing of credit score to charge a risk premium over and above the repo-linked benchmark. In fact, banks may also start linking their fixed deposits or bulk deposits with repo rate to manage better the other cost elements apart from the repo borrowings.

Going forward, the borrowers will have to take their credit score more seriously. Take, for instance, they should be more careful in payment of their card and other utility bills (in future) on time. Any delay in payments influences negatively the credit score. Similarly, it's inadvisable to have multiple consumer durable or personal loans or numerous credit cards. The borrowers should stay away from taking too many loans.

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