Buying a home is the largest financial commitment most Indians will make. Choosing the right lender matters as much as choosing the right property. Today, that choice sits between banks and housing finance companies (HFCs), a specialised category of NBFC, and each serves a genuine purpose for different kinds of borrowers.
As of May 2026, banks offer floating-rate home loans starting from 7% for eligible borrowers. HFCs start at 7.15% at their most competitive, but most price between 7.75% and 10%. The gap may appear modest at first glance. On a ₹50 lakh loan over 20 years, a 1% difference in rate translates to roughly 7.5 lakh in additional interest over the tenure.
The more consequential difference between the two is structural, and it goes to the heart of how your rate is set and how it moves over time. Since 2019, banks have been mandated to link floating-rate loans to the RBI repo rate through the External Benchmark Lending Rate, or EBLR. When the RBI cuts rates, banks must pass on the benefit to borrowers within a defined reset cycle, typically every quarter. This is a regulatory obligation, and the bank has no discretion in the matter.
HFCs operate under a separate framework. They price loans off an internal Prime Lending Rate, or PLR, set by their own board. A borrower's actual rate is PLR minus a discount, shaped by credit score, loan size, income type, property profile and, sometimes, negotiation. Two borrowers at the same HFC with different credit scores may receive very different discounts off the same PLR. When the RBI cuts the repo rate, HFCs have the flexibility to decide how and when to adjust their lending rates, based on their own cost structures and business considerations.
The documentation requirements reflect this difference in approach. Banks typically ask for the last three months of salary slips, two years of income tax returns, six months of bank statements and a credit report. For salaried borrowers, this is usually straightforward. HFCs are more flexible in what they accept as proof of income. A self-employed borrower may be asked for bank statements going back twelve to twenty-four months, GST returns, business account statements or audited financials depending on the size of the business. Some HFCs also conduct field visits or rely on cash flow patterns rather than formal documentation alone.
This flexibility is what makes HFCs accessible to borrowers whose income is real but not easily captured on paper.
Beyond eligibility and documentation, the more consequential difference shows up when interest rates change. Banks cut floor rates by roughly 100 basis points between April 2025 and May 2026, broadly matching the RBI easing cycle. On a 50 lakh, 20-year loan moving from 8.50% to 7.50%, that translates to an EMI reduction of roughly ₹3,100 a month and a total interest saving of about ₹7.5 lakh over the tenure.
Among HFCs, the response was uneven, with several cutting comparably and delivering similar savings to their borrowers. Others moved more gradually, and for a borrower whose HFC cut by only 25 basis points, from 8.50% to 8.25%, the monthly EMI saving was under ₹800 and the total interest saving over the tenure roughly ₹1.9 lakh, about 5.5 lakh less than the bank borrower gained.
So, why choose an HFC at all? Because the choice is not always freely made. Borrowers with salaried income, strong credit scores, and standard properties will almost always find a bank more competitive. The situation changes when a borrower's profile does not meet a bank's criteria. Self-employment, variable income, a lower credit score, or an under-construction property in a smaller town can each narrow the options at a bank.
HFCs assess income more flexibly, considering business cash flows, turnover and overall repayment ability rather than relying solely on salary documentation. They process loans faster and are more active in tier-2 and tier-3 markets where bank access is limited. For a business owner with variable monthly income or a professional running an independent practice, an HFC is often the more accessible and practical option. They serve a borrower segment that is large, growing and distinct in its needs The regulatory backdrop has also shifted in the borrower's favour.
Since January 2026, neither banks nor HFCs can charge prepayment or foreclosure penalties on floating-rate home loans to individual borrowers. Borrowers can now move to a lender offering a better rate at any time, without any additional cost. For anyone sitting on a rate that has not moved despite the RBI's easing cycle, this rule is worth acting on.
For a first-time borrower, the decision comes down to three questions. Does your profile meet the basic criteria - salaried income, credit score above 750, standard property? If yes, start there and negotiate. If not, approach both and compare on all-in cost rather than headline rate alone, factoring in processing fees and reset terms. And before signing, ask any lender how much of the last RBI rate cut was passed on to borrowers, and how quickly. A lender that has consistently transmitted rate cuts promptly is likely to do so again. That track record is worth as much as the rate on the day you sign.
Adhil Shetty, CEO, BankBazaar, a personal finance app