IT professional Akhil Surampally opted for a home loan through a non-banking finance company (NBFC). Even though the Reserve Bank of India (RBI) slashed interest rates by 1.25% since January 2025, his equated monthly instalments remained unchanged. His 20-year tenure has also not been reduced significantly despite rate cuts.

On 8 December 2025, the RBI reduced the repo rate to 5.25%, a 0.25% decrease. This was the fourth cut since the start of the year, bringing the repo rate down to 6.5%. The repo rate is the rate at which the RBI lends to banks.

“My plea to the NBFC has been unanswered. When the RBI rate is increased, I always receive emails about the increase in my home loan rates. But this year, when there have been four major cuts, there has been no reduction,” he says.

Why did Surampally face this non-reduction? While the RBI has lowered the rates, banks and NBFCs often delay passing on the benefit.

“One shouldn’t immediately start anticipating a reduction in interest rates linked to the repo rate. Wait for at least three to six months. If your Bank/ NBFC hasn’t reduced the interest rates or the tenure, then you can take a step,” suggests Shankar K, investment advisor.

Do all banks and home financiers reduce rates with the same lag? “Most Nationalised banks will reduce the rates with immediate effect, generally in the week following the rate cut. Other private banks and MNCs should start reducing the rates by the 15th of the following/next quarter, and hence by 15 January, floating rate borrowers should see a reduction in interest rates following the repo rate cut by the RBI,” said Vipul Patel, CEO & Founder, independent loan advisory, MortgageWorld.

By this definition, Surampally’s rate should have fallen after the 1% reduction between January and October 2025.

Type of home financier

Surampally’s loan came from an NBFC. Earlier, banks and NBFCs followed different guidelines, with NBFCs reducing rates only when the National Housing Board (NHB) cut its rates.

The RBI’s Financial Stability Report indicates that the upper tier of NBFCs relies heavily on bank borrowings and public deposits. When banks delay reductions, NBFC borrowers suffer.

The RBI has again prodded financiers to cut interest rates, pointing out that they are at a three-year low and that technology has reduced funding costs by eliminating intermediaries.

Difference in loan system

Home loans can be linked to different benchmarks: Benchmark Prime Lending Rate (BPLR), Marginal Cost of Funds-based lending (MCLR), External Benchmark Lending Rate (EBLR), Repo-linked Lending Rate (RLLR) and base rate.

Is this why this Bengaluru resident has not seen a reduction in interest rate? Traditionally, these benchmarks have been opaque, but the RBI has directed banks to link floating-rate loans to the repo rate for greater transparency.

“Irrespective of the type of interest rate linkage to MCLR, BPLR, all types of home loans should see a reduction in interest rates or tenure, whether they are availed from NBFCs or Banks”, says Shankar.

Banks also offer fixed-rate loans, where the interest rates remain unchanged throughout the term. This can be useful when rates are at their lowest.

“All home loans should see a reduction in interest rates, except fixed-rate home loans,” says Patel.

Surampally’s loan documents confirm he has a floating-rate home loan.

Margin increase

In 2025, despite four repo cuts, home financiers have increased their margins instead of reducing rates.

For new borrowers and some existing ones, like Surampally, banks raised loan margins. When he wrote to the financing company, he was told, “They have to increase the margin on my loan, hence they cannot reduce the interest rates,” says Surampally.

What is margin? Margin is the additional interest charged above a benchmark rate (like the repo rate), based on profit expectations and borrower risk.

“Borrowers, however, may or may not be able to avail the overall benefit of the repo rate reduction due to the borrowing margins being set high by banks. So instead of the full 0.25% Repo rate reduction, the lenders may pass on only 0.05% to 0.15% attributing the marginal reduction in rates to credit score and risk assessment, thereby offering a rate of 7.45-7.35% as against a probable rate of 07.25%,” explains Patel.

This means that banks can legally claim that a particular set of persons is a risky borrower, as per our study, and hence we would like to maintain a higher profit percentage to ensure our books are clean.

What to do when rates aren’t reduced

The best option is to write to your home financier with your loan account details. If there is no response within 30 days, escalate to the grievance redressal officer or the Banking Ombudsman.

Another option is negotiation. “In case your lender doesn’t reduce the home loan interest rate, then you should shop for home loans around. Before you shift your loan to another bank, head to the original bank and mention the competitive interest rate offer that you just received,” suggests Shankar.

Does this strategy of threatening to transfer the balance (unpaid loan or outstanding loan) work? “In 100% of the cases, we have seen that the original bank reduces the interest rate. In one case, it has been as high as 100 bps. Retaining a customer is better than losing the loan account to competition,” said Shankar, who is a SEBI-registered investment advisor.

Another decision

Check whether your EMI has been reduced or your tenure shortened. This can affect your overall interest outgo (see table).

“Despite the repo rate cuts, few banks have been intimating borrowers about a reduction in EMIs; however, the tenure reduction hasn’t been offered. One should note that the higher the tenure, the higher the interest outgo,” says Patel.

Ideally, borrowers who took fresh 25-year term loans in January 2025 should already see a 70-month reduction in tenure, according to MortgageWorld calculations.

What should borrowers do? “Instead of opting for a lower EMI, one should write to the bank asking them to keep the EMI steady and offer the benefit of rate reduction on a floating rate home loan via tenure reduction,” suggests Patel.

So, don’t be swayed by higher-in-hand money from reduced EMIs. Insist on tenure reduction to truly benefit from repo rate cuts.

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