The Reserve Bank is joining the global race to record low interest rates, as the current cash rate is 1.00%. While this sounds low, spare a thought for Japanese bank customers who enjoy a paltry – 0.10% interest rate.
These are strange investing times, and our clients are continually seeking a better return on their investment funds.
Naturally, there are winners and losers with low interest rates. Those with a mortgage are very happy as these low rates provide the perfect opportunity to punch a bigger hole in the principal of their loan.
For investors, however, these ground-breaking low rates are proving very challenging to our clients who rely on safe and regular income to meet their living costs and enjoy some nice things in life, such as well-deserved holidays.
Naturally, the usual rules of investment apply: the higher the return, the higher the risk. And, by risk I mean the risk of losing some of your capital, which is not always a palatable thought.
As always, consult with your financial adviser to better understand the risks and benefits of these investments. This article does not constitute specific investment recommendations. Keep in mind that all rates are current as at time of publication and may alter.
Below are six investment ideas we are currently discussing with our clients.
1 – Rate Hop
The banks rely on their customer’s laziness and loyalty so they can provide them with the lowest rates possible while maximising profits for their shareholders (see point 5 below).
Introductory rates for online saving accounts can be a good way to get an initial boost. Some rates, as at 18th July 2019, are offering 2.75% at call for 4 months (then the rate drops to 1.65%).
For larger amounts, shopping around can amount to higher interest while maintaining relative safety of being backed by large financial institutions.
Websites such as www.ratecity.com.au provide a summary of current deposit and loan rates available.
2 – Annuities
For clients who are looking for certainty of regular income and are happy to commit some funds toward a long term income stream, annuity investments can be attractive.
Basically, an annuity is investing for a regular, guaranteed income for either a period of time, typically 10 years, or for the client’s life expectancy. Current rates are between 2.25% for 2 years to 3.3% for a guaranteed lifetime investment.
There are many different variations of annuities and some aren’t as flexible as Cash accounts and Term Deposits.
More information can be found at: https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-retirement/income-from-super/annuities
3 – Mortgage Funds
These funds operate similarly to a bank in that an investor deposits money with an institution, who then lends the funds to home buyers or investors to purchase residential, commercial and industrial property. Your investment is effectively lent to the financial institution and is secured against the borrower’s property.
There are a variety of schemes, some listed on the stock market and some unlisted. However, the funds on our approved list are currently paying 5.20% – 5.70% variable rate. They should be considered for a minimum 12 month time frame due to exit costs in the first 12 months of investing.
4 – Property Funds
These funds differ to Mortgage Funds as the Fund owns the properties, therefore the investor also owns a portion of the property.
These funds tend to own large buildings such as office blocks, factories and commercial warehouses which lease them to large companies, like Woolworths, Qantas, Australia Post, Australian Tax Office and other Government departments. These companies and departments then pay rent to the owner, typically on long term leases.
These Funds provide a longer term investment option and should be considered for up to a 7 year duration. While they do pay regular income, on average between 6% – 8% at present, they can also experience capital growth as the value of the property appreciates over time.
5 – Shares
While the prices of many household name, blue chip companies have declined in the past few years, this has given investors seeking income a boost to their yield.
Also, the franking credits system remains intact following the re-election of the Liberal Government, so those in low or no tax environments, such as retirees, will continue to receive refunds for unused franking credits, giving this strategy an income boost.
Naturally these yields can move up and down depending on the results of the companies, so the key is to diversify into a variety of sectors of the economy, such as retail, banking, telecommunications, resources, and then choose a company you know and understand.
Patience is definitely required as shares can be very volatile toward long term capital growth, but focusing on the regular income from dividends can reduce some of the heartburn shares can cause.
6 – Investment Property
This strategy has worked brilliantly for many investors in capital cities as the value of metropolitan houses has increased significantly over the last 20 years. The demand from investors and owner/occupiers has been magnified by limited land releases.
We tend to see a metropolitan investment property yielding around 2 – 3%, while country properties can certainly be higher in the region of 5 – 7%, with the potential for capital growth and the physical security of bricks and mortar, this investment class will always be a good option for those with a larger amount to invest.
|CURRENT RATE||RISK RATING||TIMEFRAME|
|Rate hop||2.75%||Low||1 – 2 Years|
|Annuities||2.25% – 3.30%||Low||3 – 10 Years|
|Mortgage Funds||5.80%||Medium||1 – 5 Years|
|Property Funds||6.00% – 8.0%||Medium||5 – 7 Years|
|Shares||2.80% – 7.00%||High||7 plus years|
|Investment Property||2.0% – 7.0%||High||7 plus years|
Should you require any further information about any of these strategies, don’t hesitate to contact myself on 03 8393 1000.
With our significant knowledge and experience, Paris Financial’s Private Wealth team can provide you with tailored solutions to grow and safeguard your wealth.
Paris Financial Services Pty Ltd is a Corporate Authorised Representative (No. 357928) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135. Information contained in this document is of a general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you obtain investment and taxation advice specific to your investment objectives, financial situation and particular needs before making any investment decision or acting on any of the information contained in this document. Subject to law, Capstone Financial Planning nor their directors, employees or authorised representatives gives any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting, on the basis of the information contained in this document.