Rates seem to be staying down for now, so what are your low interest rate investing options?
Despite all the media hoopla, the RBA has chosen to keep interest rates as they are for now. Governor Dr Philip Lowe suggests that it’s steady as she goes for the foreseeable future.
“The Omicron outbreak has affected the economy, but it has not derailed the economic recovery,” he said.” The Australian economy remains resilient and spending is expected to pick up as case numbers trend lower.”
Lowe mentioned that the main source of uncertainty continues to be the pandemic. Which is to say that unlike the US, Britain and US markets, who are struggling with inflation, Australia is in pretty good shape.
Lowe said in a recent testimony to parliamentary committee that “some in financial markets look at what’s going on in the United States and Europe and say, ‘They’ve got higher inflation, it’s coming to Australia’. They may be right…” But he explained that the price rises Aussies are experienced are nothing like those seen in other countries, where there is far more going on than just the effects of the pandemic.
Looking ahead, the RBA are expecting a further rise in Australia’s underlying inflation and they plan to be patient.
“We have scope to wait and see how the data develop and how some of the uncertainties are resolved,” said Lowe. “Countries with higher inflation rates have less scope here.”
Unemployment remains low
It’s well known the RBA is looking for unemployment around 4 per cent, inflation consistently between 2-3 per cent and wages growth above 3 per cent.
The first two criteria have basically been ticked, but the wages growth figures out last week were below market expectations. This further dampened interest rate expectations for the time being.
Options for low interest rate investing
So with official interest rates remaining low for now and banks offering virtually nothing on your savings, where can you put your money to earn a decent income return? Or any return at all?
After inflation eats away at any interest you earn on your savings and the tax man takes his slice, money in the bank is barely holding its value.
As many people have realised, in order to grow your wealth it’s necessary to look elsewhere. That may mean increasing risk to get an increase in returns. To help you start that search, here’s my take on low interest rate investing.
This may sound too good to be true, but there is one absolutely fail safe, guaranteed way to make up to 20 per cent return TAX FREE. Paying down debt… particularly consumer debt.
If you have outstanding credit card balances or consumer loans, you should have no savings outside your emergency fund. Think about it. Why earn less than 1 per cent in a savings account when you’re paying 20 per cent credit card interest?
It’s a no-brainer. Credit cards and personal loans should be the first to go. And variable rate home loans are another great opportunity to put additional money saved into extra-repayments.
The second best low-risk investment is an online savings account that provides bonus interest. Check out what’s on offer here, the best rate at the time of writing was 1.35 per cent with an AMP Bank saver account. Just make sure you abide by the rules on the account to earn that bonus interest.
Term deposits are paying a little bit more but the trade off is locking away the money for a fixed term so get some advice and think about it carefully.
Blue-chip property and shares which pay good dividends are in the medium risk category for me.
On the property side, it’s never been cheaper to borrow money, and rental yields can be between 2-7.05 per cent depending on the property and the region. Plus there’s the capital growth prospects on top.
But, as we all know, direct property investment is complex and there is no certainty in future capital growth gains. The bottom line is that property can work as an income generator (through rents) and a growth asset, but you need to do your homework carefully.
High-yielding shares also continue to attract money, with dividends presenting the opportunity for tax effective returns well above bank interest rates, and the prospect of capital gains too.
This is a particularly attractive option for Aussie investors, with the S&P/ASX 200 currently boasting a dividend yield of around 4 per cent, plus associated tax benefits like franking credits.
But don’t follow the crowd into any dividend paying share; it’s still important to take a long-term view of the companies and diversify your portfolio to spread risk.
Growth assets like shares and higher risk property investments are one way to take on higher risk for higher potential returns. Talk to your brokers or adviser about those options and make sure you can cope with the higher risk.
Another interesting option are peer-to-peer companies. These are online platforms that connect people looking to borrow money with people who have money to lend.
Of course, peer-to-peer platforms can be used to build low risk loan portfolios too. But for investors they also offer the opportunity to lend money to a range of creditworthy borrowers. You can lend for longer terms to earn higher returns.
We’re talking interest rates of 10 per cent plus here, depending on the creditworthiness of the borrower. But you can at least invest in a range of borrowers so that diversity can help manage your risk.