A client reported this week that his bank offered him 0.25 per cent per annum to renew a large term deposit. The record low interest rates make cash and fixed deposits unattractive. Those holding cash are seeking alternatives for reliable income and total returns.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
This is creating demand for property, shares, farms, businesses, and managed funds investing in them. Prices are rising. This trend seems likely to continue. The Reserve Bank has indicated it intends to hold interest rates at current levels for some time.
Westpac Chief Economist Bill Evans predicts average house prices across Australia will rise four per cent this year and 10 per cent next. Many city dwellers are reviewing their quality of life and heading up or down the coast, or inland, further boosting property values in those areas.
The vaccines are coming, which should eliminate the need for lockdowns and allow economic recovery. Westpac expects the economy to grow four per cent this year. This will be good for sales, company profits and share prices.
The banks are paranoid about the "responsible lending" laws.
- Russell Tym
These factors make it an ideal time for wealth accumulators to borrow to invest. Loans are available from around 2.5 per cent per annum variable or 3.0 per cent fixed for five years. Rates will rise again eventually. Low rates are bound to boost inflation and the RBA will need to raise them to control it. That is likely to be some way off but locking in a fixed rate long term at close to variable rates may be smart. The net-of-costs rental income from property outside the cities is likely to be 3.0 per cent or more, so it should pay the interest cost.
Loans can take three months or more for approval. Investors should not bid at an auction without a loan approval, as they are unlikely to get one in time to settle the contract. The banks are paranoid about the "responsible lending" laws.
Treasurer Frydenburg wants to abolish these laws, which are holding up commerce badly, but it hasn't happened yet. To prove a loan was made responsibly, banks want 12 months statements on every deposit, loan and credit card account, 12 months payslips, three years tax returns and so on.
- READ ALSO: Orange Aquatic Centre closed for deep clean
Investors who do not want to commit to a large property loan can start smaller with a loan to buy managed funds and shares. This could be as little as $50,000 and can be increased or decreased at any time.
The loans can be against a home or property or against the investments purchased using a margin loan. Margin loan rates are higher than home loans but the tax deductibility helps. Instalment gearing is also popular, a regular monthly contribution plus an additional loan amount.
DO YOU WANT MORE ORANGE NEWS?
Receive our free newsletters delivered to your inbox, as well as breaking news alerts. Sign up below ...