Home loan: Go with a lender charging lower risk premium, say experts

While benchmark rate can change any time, spread changes only in rare instances

Once State Bank of India’s (SBI’s) festive offer ended on March 31 this year, the minimum interest rate on its home loan climbed from 6.7 per cent to 6.95 per cent.
 
But the country’s largest lender has once again brought it down to 6.7 per cent.
 
Focus on risk premium
 
The bank has reduced its loan rate by lowering the risk premium, as happens in such cases. The home loan rate is the sum of the benchmark rate and the risk premium. “Borrowers can today lock into the lower premium that SBI is offering. This benefit of a lower premium will stay with them, irrespective of changes in the benchmark repo rate in the future,” says Gaurav Gupta, founder and chief executive officer (CEO), MyLoanCare.in.
 
The premium applied changes rarely — only if there is a change in the customer’s risk grade. If he defaults on his EMIs, or if the nature of his employment changes — say, from salaried to self-employed — only then does his risk grade change. Adhil Shetty, CEO, BankBazaar.com, too, emphasises the importance of choosing a lender with a low spread. “Unless there is a drastic change in the customer’s credit score, his spread is unlikely to change over the loan tenure,” he says. 
 
What rate will you actually get
 

While banks and housing finance companies (HFCs) have headline rates that are pegged low, the actual rate you get will depend on a host of other factors.
 
The key is your credit score. “A bank like SBI has six risk grades, which determines the rate the customer is offered. Credit score plays a big part in determining the risk grade into which he falls,” says Aditya Mishra, founder and CEO, SwitchMe, a digital home loan broker.
 
Your loan rate could also depend on the home loan product you choose. SBI, for instance, has a product called Maxgain (other lenders also offer similar products). Suppose, you take a home loan of Rs 1 crore and later you receive a windfall of Rs 10 lakh. You can park this amount in your loan account. Your principal will now be deemed to be Rs 90 lakh. Later, if you need some money, say, Rs 5 lakh, you can withdraw it. Now, the principal will be deemed to be Rs 95 lakh. “Such a product gives you the benefit of prepayment and also offers liquidity. But such products carry a slightly higher interest rate. In the case of Maxgain, it is 35-basis points higher than the normal home loan rate,” says Mishra.
 
The interest rate also depends on the loan amount. Higher the loan amount, higher is the risk to the lender, and therefore higher is the rate it charges. The loan-to-value (LTV) ratio also impacts the interest rate. “If your LTV is lower, your stake in the property is higher. This reduces the risk to the lender, allowing it to offer a lower rate,” says Shetty. 
 
A shorter loan tenure also translates into a lower rate.
 
Businessmen and self-employed professionals are usually charged 15-50 basis points more than salaried borrowers. If a woman is among the co-borrowers, lenders could offer a small discount (say, 5-basis points).
 
What can you do? 
 
Check your credit score before applying for a loan. If it is unnaturally low, investigate the reasons. Sometimes the score could be low due to a mistake. Get it rectified before you apply for a loan. Finally, remember that in a competitive market, you can get a better rate by negotiating hard for a better deal.