Businesses benefit from a low and stable interest-rate environment. It’s cheaper to borrow to grow the business – a major reason why the Reserve Bank lowered interest rates to stimulate business investment.
For everyone cheering on low rates there will be someone booing them.
People who depend on term deposits, high-interest savings accounts and bonds have seen their interest income fall by more than half.
Self-funded retirees are particularly affected, especially where interest payments make up most of their income.
Low rates are not always the friend of new entrants into the housing market as commonly touted.
Low interest has been a major contributor to the rise in house prices, saddling new borrowers with higher levels of debt. With higher debt, any future rate rises will bite harder, so new borrowers need to carefully assess their ability to meet loan repayments when interest rates do rise. It’s also a good idea to reduce debt whenever possible.
Life is also difficult for investors, including everyone contributing to superannuation.
The low yield from conservative investments – cash and fixed interest – means there is a greater ‘cost’ in minimising portfolio risk than has previously been the case. One consequence of this is to drive many investors to search for other investments that offer higher cash returns at a potentially higher risk.
While a bank share paying an annualised 5.83 percent dividend, including franking credit, looks very attractive beside a term deposit offering 1.70 percent interest, it needs to be remembered that, in the current climate, any effort to increase yield comes with an increase in risk.
Even so, high-yield shares can be a viable option for some investors who need a regular income.
The best way to navigate the world of low-interest rates depends very much on your personal circumstances. Good advice is critical, so talk to your licensed financial adviser about your situation.
The entire October 23, 2019 edition of The Weekly Advertiser is available online. READ IT HERE!