Home loan getting costlier? How a higher credit score can save you lakhs even when interest rates rise
In today’s competitive lending environment, many homeowners are successfully reducing their mortgage rates thanks to improved credit scores. A higher credit score signals a reliable repayment history, empowering borrowers to negotiate better terms...
When Gurugram-based finance professional Vikram Tiwari saw his credit score rise from around 780 to 803, he spotted an opportunity to cut the interest cost of his Rs.72 lakh home loan. The improvement helped him negotiate a reduction in his interest rate from 8.45% to 7.5%, translating into estimated savings of around Rs.6 lakh over his remaining tenure.
“I have always been diligent with my repayments, so my credit score had improved organically over time. It helped in lowering my interest rate,” he says.
Like Tiwari, several borrowers with strong credit profiles, including an impeccable repayment track record, are finding that their diligent behaviour can earn them better deals from lenders. This matters more as borrowing costs are set to rise. On 7 October, the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.5% and shifted its monetary policy stance from neutral to calibrated tightening, signalling that further rate hikes remain a possibility. Economists expect the central bank to hike the repo rate by 75 basis points (one basis point equals 0.01 percentage point) by April 2027.
For home loan borrowers, it’s more important than ever to keep their credit profiles in good shape and explore opportunities to negotiate a lower rate with their lenders. Even a modest interest-rate reduction can translate into substantial savings.
Credit score to the rescue
All retail floating-rate loans sanctioned by banks after 1 October 2019 are linked to an external benchmark, typically the repo rate. Banks must pass on repo rate changes to borrowers, ensuring better transparency and transmission than older base rate- or marginal cost of funds-based lending rate (MCLR) loans. However, non-banking financial companies (NBFCs) are exempt from this regime.
The effective home loan rate essentially comprises the external benchmark chosen by banks (repo in the majority of cases), operating costs and credit risk premium. While the RBI sets the repo rate, the spread is the additional amount a lender charges over the benchmark rate. The RBI’s Commercial Banks – Interest Rates on Advances Directions, 2025 leave the spread to banks. However, banks must follow a board-approved policy for setting spreads. “The other spread components may be reduced by banks for a loan category earlier than three years for customer retention, on justifiable grounds, in a non-discriminatory manner, and in terms of the bank’s policy,” the circular says.
The policy must specify the components of the spread and the range applicable to each borrower category. Therefore, the spread can vary across lenders and borrower categories. “The credit risk premium charged to an existing borrower shall not be increased except on account of deterioration in the credit risk profile of the customer or change in tenor premium,” RBI directions state.
Some banks transparently disclose differential effective interest rates for various borrower categories, depending on their credit scores, on their websites. For instance, Bank of India currently offers 7.35% annually to those with scores above 840, 7.5% for scores of 825-839, and 7.65% for scores of 760-799. Non-salaried borrowers in the last category pay 0.1 percentage point more. Rate grids vary across banks, but credit profiles remain a key factor even when not explicitly disclosed.
Ordinarily, banks can review operating costs once every three years. The credit risk premium, however, can be revised only when the borrower’s credit profile changes. This gives borrowers whose credit scores have improved an opportunity to negotiate a lower interest rate with their lenders.
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Take the case of Ahaan Pandit, a finance professional based in Bengaluru. He took a Rs.46 lakh home loan at 8% in 2018, when his credit score stood at 730. Over the years, his score improved to 810, but the bank did not lower the credit risk premium on his loan. In 2024, he realised the lender offered lower rates to borrowers with credit scores above 800. “I emailed my bank, highlighted the improvement in my credit score and asked it to reprice my loan,” he says. The result? The bank agreed, resulting in interest savings of nearly Rs.14 lakh.
While Pandit and Tiwari belong to a growing tribe of financially savvy borrowers who know how to negotiate better deals, awareness of the opportunity remains low. “Close to 70% of the borrowers on our platform are overpaying due to wider spreads on underlying loans,” says Kunal Shah, Co-founder of SURE Financial, a loan analytics start-up.
However, a higher credit score does not automatically translate into a lower interest rate. “The sanctioned spread reflects the borrower’s profile at the time of sanction.
The bank has no obligation to re-underwrite the loan just because the score has improved. However, borrowers can cite their improved credit scores to seek a reduction in the spread,” says Vipul Patel, Founder of MortgageWorld, a loan consultancy firm.
You must take the initiative to request a rate revision. “The lender will not change the risk premium or spread automatically. It depends on a request from the borrower,” Patel adds.
The bank will use its discretion on repricing. A higher score alone will not ensure the entire credit risk premium comes down. “You should seek a full reassessment covering income, leverage, repayment history, collateral and loan-to-value (LTV). Where the credit assessment has substantially changed, the borrower can ask for a premium review under the loan agreement,” he adds.
How a higher credit score can lower home loan costs
Assumptions: 1. Ten EMIs have been paid from December 2025 to September 2026 at 8% per annum; 2. The rate change (due to the RBI repo rate hike) takes effect from November 2026 (month 11). 3. Post repo hike, borrower increases EMI, not tenure. 4. Borrower retains this increased EMI post negotiations with lender. Source: MortgageWorld.in
Making the switch
Before approaching your lender to renegotiate your home loan rate, understand the terms and conditions of your loan agreement. Establish the external benchmark your loan is linked to, the current benchmark rate, the contractual spread and the effective interest rate. “Ask for the spread breakup. Check the loan agreement for the credit-risk review clause and the reset frequency, which must be at least quarterly,” says Patel.
While banks must review rates at least once every quarter for external benchmark-linked loans, check your loan agreement to understand the terms governing a review of the credit risk premium. These will vary across lenders. Some may conduct a half-yearly assessment and link revisions to improvements in your credit score, while others may consider several factors when reassessing your credit profile.
“Gather the latest credit bureau report, your repayment track record, updated income documents and evidence of lower leverage or improved LTV,” advises Patel. Also, compare existing lender’s rates and policies with those of competitors when you make your case. “You can start the process by requesting banks to reduce credit risk premium if your score has improved. An email or conversation with your relationship manager will do the needful,” says Shah of SURE. Banks may levy a one-time fee to switch to a lower rate, ranging from Rs.3,500-6,000 depending on their internal policies. RBI rules require banks to allow borrowers with older MCLR- or Base Rate linked loans to switch to external benchmark-linked rate (EBLR) loans without charges, except for reasonable administrative and legal costs.
How to boost credit scores
Improving your credit score requires consistent credit discipline over time, not quick fixes. Credit discipline— timely repayment of home loan EMIs and credit card bills as well as clearing overdue amounts—can strengthen your credit profile. “It is important to understand that the credit score reflects a long-term view of the borrower and it takes some time for such actions to reflect in the score,” says Manish Jain, Country Managing Director, Experian India.
You should also check your credit reports regularly to identify discrepancies. “Errors in the report, outdated information or fraudulent activity could affect the score, even when repayments are made on time,” says Jain. Credit information companies –TransUnion CIBIL, Experian, Equifax and CRIF High Mark–are mandated to allow borrowers access to their credit report at least once a year, free of charge. You can also access your score and report through your banks.
Avoid taking on multiple unsecured credit products, such as personal loans and credit cards, without assessing your repayment capacity. Applying for several credit cards within a short period is also not wise, as this can signal excessive dependence on credit.
“Also, assess the repayment habits of the primary borrower before becoming a co-applicant on a loan. Missed payments by the primary borrower can affect your credit score,” says Jain.
Nalgonda-based Ruthvick Reddy learnt this the hard way when he agreed to be the guarantor for an acquaintance’s loan. “My credit score was affected earlier, falling to around 740, as the borrower had delayed repayments,” he says. Consequently, when he applied for a home loan in 2019, he was charged an interest rate of 9.05%. Since then, his score has improved to 770. “I worked towards building a strong credit profile by making regular credit card payments. My improved credit score helped me reduce my interest outgo after I negotiated with my bank in 2024,” says Reddy.
Keeping credit card spending under control and avoiding multiple unsecured credit products without assessing affordability are critical, especially when festive offers on cards and personal loans are omnipresent on e-commerce platforms and in physical stores. Ask yourself whether you really need a new appliance or a new gadget before buying. “Avail loans and credit cards in line with your actual requirements, and ensure that your total borrowing remains within your repayment capacity,” advises Jain.
