Credit score up? Home loan rates won't drop till you ask

Pay EMIs on time to boost your credit score, renegotiate for better loan terms with your bank

- Sashind Ningthoukhongjam

When Ram took his first home loan two years ago, he didn't have a credit history, so the bank offered him a 9% interest rate. Fast-forward to today—after two years of consistently paying his EMIs on time, his CIBIL score soared past 800.

Armed with a strong credit score and a little persuasion, Ram returned to his bank and convinced them to lower his interest rate to 8.5%. That 50-basis-point drop may sound small, but it translated into savings of ₹25 lakh on his ₹1 crore loan over 25 years.

Though Ram's example is illustrative, the approach is grounded in reality—many borrowers successfully negotiate lower interest rates after their credit scores improve.

In this article, we'll walk you through how banks calculate interest rates and how you can make sure you're getting the most favourable terms possible.

How banks set interest rates

Banks consider three key factors when deciding how much interest to charge on a loan.

The first is the repo rate—the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Since this rate is controlled by the RBI, banks are required to revise their lending rates in response to any changes. As of now, the repo rate stands at 6.25%.

The second factor is the markup or spread, which is essentially the bank's profit margin. For instance, if the bank applies a 2.75% markup on top of the 6.25% repo rate, the effective home loan interest rate becomes 9%.

The third factor is the borrower's creditworthiness. If banks are confident that a borrower is low-risk—typically indicated by a high credit score—they're often willing to reduce their profit margin.

For example, instead of charging the full 9%, a borrower with a strong CIBIL score of 800 or above might receive a discount of 80 basis points, thereby bringing the effective interest rate down to 8.20%.