How investors are flipping the script on low interest rates

How investors are flipping the script on low interest rates
May 28, 2019 Cathy Howard

Low interest rates aren’t ideal for everyone. What do low rates mean for investors, borrowers, and business owners? And how can everyone win in our low-rate environment?

It’s a maxim that’s perhaps as old as interest rates themselves: low interest rates are good for borrowers, but not so good for investors…

As interest rates drop, so too do the returns paid out on many investments – and that can mean leaner and more uncertain times. Banks have increased interest rates regardless of the Reserve Bank’s official cash rate, but no one knows with any certainty what the future holds. Most predictions are that they will remain at the low end for some time to come, so while borrowers love low rates and investors curse them, what can be done to make the most of the situation?

Implications of cash rate cuts and recent market events

The Reserve Bank (RBA) has already slashed official cash rates to record low levels, but there’s plenty of evidence to suggest they’re not done yet. RBA Governor Philip Lowe himself has made it clear he plans to cut rates at the Reserve Bank’s June meeting, pointing out that growth in international trade has declined and investment intentions have softened in a number of countries. The RBA also notes that cash rate cuts are stimulating the economy less now than they used to. Many households carry historically high levels of debt and – with the housing market faltering in some parts of the country – there is a climate of uncertainty in the community… leaving many people less willing to part with their mortgage interest savings.

That uncertainty is also affecting financial experts, with a lack of clear consensus about what the next few years will hold in the market. However, many leading economists suggest that further cuts to the cash rate are inevitable in the second half of 2019, potentially taking the official rate down to 1% by the end of the year. Some highly-respected economists now predict the cash rate will go even lower in 2020 and few – if any – predict a serious recovery in the next 18 months at least.

We’re likely to see historically low interest rates for quite some time… but what does this mean for investors, borrowers, and business owners?

Low interest rates: Who wins?

As always, low interest rates are great news for anyone paying a mortgage – particularly if that mortgage was taken out at a time of higher interest rates and is being repaid at the original amount. Extra repayments can drastically reduce the lifespan of a mortgage, and make a huge dent into the amount of interest that needs to be repaid. All of that equals great news for homeowners.

Property investors can also make gains if they are careful – but there are a number of caveats worth noting. It’s never been more important to know your market, with swollen (but falling) property prices in a number of capital cities, coupled with low rental yields and oversupplies of certain types of housing stock creating a potentially disastrous storm for investors.  Get it right and you’ll be laughing all the way to the you-know-where… get it wrong and the ramifications on your portfolio could be significant.

If you’re considering property investment, it’s vital to plan for the day when higher interest rates may again be the norm. It’s easy to overextend yourself when the price of debt is so cheap, but reaching too far will prove disastrous if future payments become a stretch – particularly if property prices fall or stagnate before then.

Low interest rates are also good news for business owners who are looking to borrow money to expand their businesses. When it’s cheaper to borrow, growth becomes easier – which is one of the key reasons the Reserve Bank lowered the official cash rates to begin with.

Low interest rates: Who loses?

In the current market, some people who depend on term deposits, high-interest savings accounts and bonds have seen their interest returns fall by more than half.

Self-funded retirees are particularly affected here, and many have seen their incomes take a serious hit as interest rates have plummeted.

Investors also tend to miss out, including anyone contributing to a superannuation fund – which is a fairly significant chunk of the population.

First home buyers, already doing it tough thanks to high house prices (themselves partially a product of prolonged low interest rates), can find themselves left even more vulnerable in the current market.  Despite the softening of house prices in a number of places around the country, people looking to enter the property market for the first time are still battling higher prices relative to income than any generation before them. It’s all too easy for them to overextend, leaving themselves very exposed when interest rates do head up again.

Low interest rates can create additional risk for investors

Investors who, for various reasons, may have traditionally chosen conservative and low-risk options have been seeing significant reductions in their returns. This has driven many of them to search for other investments that offer higher returns – often at higher levels of risk.

For example, a bank share paying an annualised 6.18% dividend (including franking credit) may look very attractive beside a term deposit offering 1.40% interest, but it needs to be remembered that any effort to increase yield generally comes with more risk.

While high yield shares can be a viable option for some investors who need a regular income, it’s worth careful consideration to ensure the risk is manageable and appropriate – particularly in such uncertain times.

Many investors are turning to fixed income funds

As always, it’s important to keep perspective. There’s a silver lining to every cloud, and plenty of opportunity to make solid returns on your investment dollars – if you’re looking in the right place. Investors can look to high-return, regular income investments, such as Skyring’s Fixed Income Fund which offers 6.95%^p.a. paid monthly for the first six months, and then 6.5%^p.a. paid monthly ongoing. By providing capital to borrowers, Skyring’s clients generate long-term, capital-stable income streams for their portfolio. These are secured by first mortgage high-quality, investment-grade properties and businesses within Australia.

The Skyring Fixed Income Fund offers an industry-leading return and high degree of certainty in an uncertain time. You can get started with as little as $10,000, and you’ll receive your distributions within the first five days of every month, just like clockwork.

If you’re frustrated by the returns offered by term deposits, cash accounts, shares, or traditional property investment opportunities, or are tired of waiting for infrequent interest payments… consider the Skyring Fixed Income Fund.

What Next?

The best way to navigate the world of low interest rates depends very much on an individual’s personal circumstances. Good advice is critical, and a licensed financial advisor is an important first step. Remember that there are always appropriate investments available out there, whether interest rates are falling or climbing. Choosing and finding the right option for your personal situation depends very much on whether you’re willing to throw caution to the wind in an uncertain market, or would rather play a steady hand with a strong, stable, regular return^. The Skyring Fixed Income Fund is a great way to flip the script in today’s low interest rate environment. Invest a few minutes of your time reading about it here.

This article originally appears on Nest Egg.

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