Negative bank rates – yeah right!

It’s official: the world has gone mad. In Denmark a bank is paying people to take out a home loan with them.

Wednesday, September 4th 2019, 6:18AM

by Mint Asset Management

By: David Boyle

Jyske, Denmark’s third largest bank, is offering a mortgage rate of -0.5% for 10 years. Not bad at all, but spare a thought for the savers in 20 countries where they have to pay to put their money in five-year government bonds. Both sound like great material for a Tui ad, but in this case it’s true.

It was 31 years ago to the month when I bought my first house in Christchurch. It was one of my proudest moments, even though all I had was a bed, my grandma’s couch and her Thorn colour TV to fill it. I didn’t even have a fridge.

My mortgage rate was 18%. No, that isn’t a typo, 18%. On the other side of the ledger my mum was getting high double digit returns in her bank deposits. Three months later my mortgage went up to 22% and I still hadn’t got a fridge.

Fast forward to 2019 and you can get a mortgage as low as 3.55%. That’s great news for people struggling to get on the housing ladder, especially in Auckland.

As for those looking to grow their savings or income in the bank the news isn’t so good. A 12-month term deposit with most large banks is around 2.8%.

My worry is that New Zealanders, particularly those who have retired and are on a fixed income, will be tempted to chase better returns, but without taking into account the risks of doing so.

Add the fact we are living longer and inflation is eating away at our buying power, it’s getting harder and harder to make our income last as long as we do. This is where your role as a financial adviser and the advice you provide is more important than ever.

Now I’m not trying to tell you to suck eggs on this topic because you know this stuff better than I do. But when I see high returns popping up everywhere, some with promises of 8% guaranteed per annum this really worries me. It feels like déjà vu all over again.

On the flipside those Kiwi’s living on a fixed income are going to find this current environment very challenging, especially as their term deposits start rolling off their old rates.

We all have a role in the financial services industry to help with some key messages, especially around understanding risk and return, the benefits of real diversification, and how an investment in some qualified financial advice can go a long way to help with your overall financial outcome.

Talking about the possibility of having negative interest rates in New Zealand still sounds incredulous and who really knows if it will happen. One thing is for sure we can expect lower interest rates for longer and New Zealanders need your help to “miss some of the too-good-to-be-true” investment landmines that are out there right now.

At Mint we are kicking off September with a thought leadership piece on this very topic. I’ve book ended this article to give you a sense of the style and what the key messages are. Feel free to use this article on our website for your client newsletters or general correspondence.

I know the three points are not rocket science, but I feel they are more relevant now than they have ever been before.

Diversify, don’t put all your eggs in one basket. It’s a simple concept but can easily be forgotten when seeking a better return or get-rich-quick schemes. This doesn’t just mean putting your investments into different banks either. This message has been echoed by the Reserve Bank governor recently, who encouraged investors to look at all investment options, not just money in the bank.
If you have some time before you retire take on a little more risk with your investments, but be careful about going crazy. Most likely, all going well, you will have at least 20 or 30 years to go before the certainty other than taxes catches up.

Even if you are retired now you might like to consider this option too. I’m not advocating you throw all your money into the stock market, however there are investment products like Income Funds that allow for better returns by investing a smaller percentage of capital into shares and property, as well as cash and bonds. But be aware this will mean your capital will go down sometimes too.
Get some qualified advice. The Government has recently reviewed and increased the requirements to give financial advice and it’s the adviser’s job to make sure whatever you invest in is appropriate for your own personal circumstances. Yes there is a cost, much like seeing an accountant or lawyer, however an adviser will be able to build an investment plan that’s right for you.

The so called good old days for bank depositors are long gone but I think there has never been a better time to be a financial adviser and for the financial advice industry to show their real value to improve more New Zealanders overall financial wellbeing.

MINT ASSET MANAGEMENT LIMITED IS THE ISSUER OF MINT ASSET MANAGEMENT FUNDS. DOWNLOAD A COPY OF THE PRODUCT DISCLOSURE STATEMENT HERE.

Mint Asset Management is an independent investment management business based in Auckland, New Zealand. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement at mintasset.co.nz

Tags: financial advisers Fixed interest interest rates Mint Asset Management