The Reserve Bank is joining the global race to record low interest rates, current cash rate is 1.50%. However rates are currently 0.5% in the US and negative interest rates in Japan!
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 and 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, not always a palatable thought. However, the options below have been solid performers for many years now without adversely impacting client’s capital.
As always, consult with your financial adviser to better understand the risks and benefits of these investments and do not constitute specific investment recommendations. All rates are current as at time of publication and may alter.
Below are 6 investment ideas we are currently using with our clients to boost their income.
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).
We always advise clients to shop around, make some enquires with other institutions. Websites such as www.ratecity.com.au have a wide variety of comparison tools to assist you.
Introductory rates for online saving accounts can be a good way to get an initial boost, current rate as at 6th September 2016) BankWest Telenet Saver are offering 3.00% at call for 4 months (then the rate drops to 1.50%).
For larger amounts, shopping around can amount to higher interest while maintaining relative safety of being backed by large financial institutions.
2 – Annuities
For clients looking for certainty of regular income and are happy to commit some funds toward a long term annuity investment. 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 3.5% to 5.0% depending on the length of time of the contract.
There are advantages and disadvantages to annuities, visit the following Money Smart website for further information.
3 – Mortgage Funds
These funds operate similar 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. So your investment is effectively lent to the financial institution and is secured against the borrower’s property.
There are a variety of schemes, both listed on the stock market and 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 are for a longer term investment and should be considered for up to a 7 year duration. While they do pay regular income, on average between 5% – 7% at present, they can also experience capital growth as the value of the property appreciates over time.
5 – Shares
Recent declines in many household name companies has boosted their yield. For example, yields as at 6th September 2016 Telstra currently yields 6.0%, Wesfarmers (owner of Coles and Bunnings) 4.4%, Woolworths 3.5% and NAB 7.2%. Resource stocks such as BHP are typically low dividend payers, currently BHP yields 2.2%.
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 retaining, banking, telecommunications, resources and then choose a company you know and understand.
Typically I start with becoming your bank, why not own part of the company charging fees and interest, which is all for you – the shareholder!
Patience is definitely required as shares can be very volatile toward long term capital growth, but focussing 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 10 years, as the demand from investors and owner/occupiers has been magnified by limited land releases.
In our strategic advice, we tend to see a metropolitan investment property yielding around 2 – 4%, 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 large amount to invest.
Should you have any questions, please call Senior Financial Adviser Darren Foster at Paris Financial on 8393 1000 to discuss further.
|CURRENT RATE||RISK RATING||TIMEFRAME|
|Rate hop||3.0%||Low||1 – 2 Years|
|Annuities||3.5% – 5.0%||Low||3 – 10 Years|
|Mortgage Funds||5.7%||Medium||1 – 5 Years|
|Property Funds||5.0% – 7.0%||Medium||5 – 7 Years|
|Shares||3.0% – 8.0%||High||7 plus years|
|Investment Property||2.0% – 7.0%||High||7 plus years|
Darren Foster, Senior Financial Planner, Paris Financial
Follow me on Twitter @darren_df
Image courtesy of Ppiboon at FreeDigitalPhotos.net
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.