Why isn't your home loan EMI dropping after RBI rate cuts? Blame your lender

Time of India

17 hours ago

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Have you ever wondered why your home loan EMI refuses to budge even when the Reserve Bank of India (RBI) announces a rate cut? If you've borrowed from a Housing Finance Company (HFC), you're not alone in this frustration. While your friend with a bank loan celebrates a lower EMI within weeks, you might wait months—or may not see the benefit at all.The culprit isn't inefficiency but a fundamental difference in how banks and HFCs operate—one that can cost you thousands over your loan's lifetime, making lender choice far more critical than most realise.This is where the question of where you borrow from, a bank or an HFC, becomes crucial. While both provide home loans , their business models, funding sources, and regulatory frameworks differ.'Banks raise funds primarily from customer deposits, which gives them access to low-cost capital. This allows them to offer lower interest rates and, importantly, makes it easier to pass on the benefits of a repo rate cut. Since October 2019, banks have been required to link all new floating-rate home loans to an external benchmark, most often the RBI's repo rate,' explains Vipul Patel, Founder & MD, mortgageworld.in. This means that changes in policy rates are transmitted quickly, often showing up in the borrower's EMI within a month.HFCs, by contrast, raise funds from banks or from the market, often at higher costs. Their lending rates are usually pegged to their own internal benchmark—the Prime Lending Rate (PLR)—which they adjust at their discretion. These adjustments tend to happen less frequently. As a result, even if the RBI cuts rates, HFC borrowers may have to wait longer to see the benefit, and the reduction may be smaller than the headline cut.'In HFCs, reset periods are typically longer, commonly six to twelve months, so borrowers may face delays. To access lower rates, they usually need to request a conversion and pay a switch-over fee, which is allowed under National Housing Bank (NHB) guidelines,' says Akhil Rathi, Head – Financial Advisory, 1 Finance. While NHB also places limits on prepayment penalties for floating-rate loans, other charges like processing fees still apply when switching between lenders. However, the differences go beyond rate-setting.Over the past five to six years, home loan borrowers have seen interest rates fluctuate in ways that have had a direct impact on their finances. In October 2019, the RBI's repo rate stood at 5.15%. By May 2020, as the pandemic hit the economy, it was cut sharply to 4%, the lowest in decades, making home loans cheaper than ever before. Rates remained at that level for almost two years, giving borrowers some much-needed breathing space. However, by mid-2022, inflationary pressures prompted the central bank to resume rate hikes, and by February 2023, the repo rate had climbed to 6.50%.Interest rates are passed on faster by a bank, but there are more factors to be considered.For much of 2024, rates remained unchanged, but in early 2025, the trend reversed as inflation eased. Between February and June 2025, the RBI cut rates by a full percentage point, bringing the repo to 5.50%. When rates fall, borrowers with floating-rate loans stand to save thousands over the life of their loan. A cut of just 0.25 percentage points on a Rs. 50 lakh loan for 20 years can reduce the monthly EMI by about Rs. 820 and total interest costs by nearly Rs. 2 lakh.Double the cut to 0.50 percentage points, and the savings rise to roughly Rs 1,640 per month, or close to Rs.4 lakh over the tenure. On larger loans, the benefit is even more striking: an EMI drop of over Rs 3,200 and interest savings of nearly Rs 8 lakh for a Rs 1 crore loan.However, the size of the rate cut announced by the RBI is only half the story. The other half is whether, when, and how your lender passes on that benefit. If your loan rate hasn't moved despite central bank cuts, it could be because you're on a fixed-rate loan that stays unchanged until the reset date, your lender's quarterly or semiannual reset hasn't kicked in, or—especially with some HFCs—their borrowing costs haven't dropped enough to pass on a cut.'Loan sanctioning is usually more complex with banks in comparison to the HFCs,' says Adhil Shetty, CEO, BankBazaar.com. 'Banks have more stringent paperwork requirements for home loans, while HFCs usually have fewer formalities. Banks are also more stringent on the credit score requirements. If you scan the loan marketplace, you'll see that HFCs have more relaxed policies towards customers with low credit scores.' However, with a low score, both banks and HFCs will likely charge you a higher interest rate, and the rate charged by an HFC would be significantly higher than that charged by a bank.There are also some misconceptions. One common belief is that HFCs can finance a bigger share of your home's value than banks. Shetty clarifies this is not true because both are bound by RBI's loan-to-value (LTV) rules. LTV stands for the maximum share of a property's value that a lender can finance. For example, up to 90% for smaller home loans (Rs.30 lakh or less), 80% for loans between Rs.30 lakh and Rs.75 lakh, and 75% for loans above Rs.75 lakh.The buyer must pay the rest as a down payment. 'Neither banks nor HFCs can include stamp duty and registration costs in the property value while calculating LTV,' adds Shetty. Those charges always have to come out of your pocket. So, in terms of how much of the property price they can finance, HFCs have no advantage over banks, though they may be slightly more lenient on the Fixed Obligation to Income Ratio (FOIR), which gauges how much of your income goes to existing loans. If FOIR is too high, the lender may reject the loan or approve a smaller amount.'For someone in a stable, salaried job with a good credit score, a bank is likely to be the better option for the long term,' advises Patel of Mortgageworld. Not only are interest rates typically lower, but the faster transmission of rate cuts can make a significant difference over the life of the loan.Self-employed individuals, those with irregular income, or borrowers in urgent need of quick disbursal might find an HFC more accommodating. In cases where a property is part of a developer's tie-up with a particular HFC, starting with that lender might be the easiest path, with the possibility of refinancing to a bank later for a lower rate. Borrowers with borderline or low credit scores may also have a better chance of approval with an HFC, although they should be prepared to pay a higher interest rate.Ultimately, the decision comes down to striking a balance between cost and convenience. A bank may save you more money over time, but an HFC may approve your loan when a bank won't or approve it faster. The good news is that with RBI regulation now covering both banks and HFCs, the playing field is more level than it used to be.'While the HFCs may be faster and more accommodating than banks, borrowers should be aware of trade-offs such as slower benefit from rate cuts, potentially higher interest costs, and fees for switching or converting rates,' says Rathi of 1 Finance. Proactively reviewing loan terms and monitoring interest rate movements can help maximise savings.Patel from Mortgageworld says that the remaining gaps between banks and HFCs must be closed. 'HFCs must be told to use external benchmarks that speed up rate transmission for their customers.' Standardising reset cycles, improving disclosure of the 'true' annual percentage rate, and making it easier and cheaper for borrowers to switch lenders would give consumers more power to make the choice that suits them best. 'The ultimate goal is a housing finance market where the decision between a bank and an HFC is based purely on service and borrower fit, not on who will pass on an RBI rate cut first,' he adds.