Opt for 3- to 6-month fixed deposits for now; lock in at higher rates later

Home loan borrowers must pre-pay, or opt for higher EMI, to prevent loan tenure from rising

After the Reserve Bank of India (RBI) Governor Shaktikanta Das’s comment some last month that a rate hike in the June monetary policy was a no-brainer, the focus had shifted to the quantum of the hike. The central bank chose to front-load its rate hikes by opting for a 50-basis-point (bp) increase.

Staggered rise in deposit rates

Usually, bank deposit rates lag the repo rate, as was evident after the hike in May. “The pace of hike in deposit rates in the future will depend on credit demand and overall liquidity in the system. Any further growth in credit demand, and/or a quicker-than-expected withdrawal of excess liquidity could force banks to resort to steeper and quicker fixed deposit (FD) rate hikes,” says Naveen Kukreja, chief executive officer (CEO) and co-founder, Paisabazaar.com.

Stick to shorter-tenure FDs

With inflation continuing to remain high, more repo rate hikes are expected in the near future.

“Investors who have a lump sum should deposit it in an FD of three to six months. Locking into longer-tenure FDs would be a mistake at this juncture. If after six months you feel deposit rates have peaked, lock into one- or two-year FDs,” says Adhil Shetty, CEO, BankBazaar.com.

According to Arnav Pandya, founder, Moneyeduschool, “The time to lock into longer-tenure FDs will be once the inflation rate has stabilised.” 
 

Those who have larger sums should ladder their investments. If you have, say, Rs 3 lakh, then invest Rs 1 lakh in a three-month FD, another Rs 1 lakh in a six-month FD, and so on. “This way you will receive money at regular intervals. You can reinvest this money in a staggered manner and thus take advantage of rising rates,” says Arvind A Rao, certified financial planner and founder, Arvind Rao and Associates.

Don’t opt for the auto-renewal facility. “Doing so will allow you (at the time of renewal) to consciously choose an FD tenure based on your investment horizon and the highest FD rate slab available for it,” says Kukreja.  

Pre-pay, or raise EMI 

Longer-tenure loans, like home loans, mostly have floating rates. Most shorter-tenure loans, like auto and personal loans, are fixed-rate loans (though floating-rate options are also available).

Both new and existing floating rate home loan borrowers should expect a steady increase in borrowing costs in the near term. Those who don’t proactively opt for an increase in EMI will have their loan tenure increased. “The increase in interest cost is higher for the tenure-increase option than for the EMI-increase option,” says Kukreja.

According to Rao, “Borrowers who are feeling the pinch of home loan EMIs should look to prepay the loan out of their savings.”

Shetty suggests customers should target prepaying at an optimal rate of 5 per cent of the principal outstanding annually, which is easily achievable.

Home loan borrowers who have restricted liquidity may also opt for the “home saver” option. Under this facility, an overdraft account is opened in the form of a savings or current account where the borrower can park his surpluses and withdraw from it based on his needs. “The interest component of the loan is calculated after deducting the surpluses parked in the savings or current account from the outstanding home loan amount. Borrowers are thus able to derive the benefit of making prepayments without sacrificing their liquidity,” says Kukreja.

Keep an eye on your credit score. “If it has deteriorated since the time you took a loan, the lender reserves the right to hike your home loan rate,” says Shetty.

On the other hand, if your credit score has improved, explore the possibility of getting a loan at a lower interest rate through home loan balance transfer.