High Interest rates are not all bad

Simon Pearse (pictured), CEO of Marriott: the Income Specialists, notes that high interest rates are not as bad as they may seem. They provide excellent buying opportunities and boost the earnings of retirees.

There has been much bad press about the high level of ruling interest rates, but all too often we forget the retirees who invariably hold a significant part of their savings in bank deposits and money market funds. High interest rates improve their lifestyle, just as low rates do the opposite. Through the last period of low interest rates many elderly people were forced to reduce their expenditure substantially. This usually goes unnoticed as low interest rates are synonymous with booming markets and general affluence: a time when banks lend money with enthusiasm, property prices only “go up”, and the consumer spends recklessly.

The boom is now over for the time being, and we are saddled with high interest rates and, for many, too much debt, a property that is rapidly losing value, and a business that is feeling the pinch. Again we forget the retired person who is now enjoying the benefits of more income from the bank deposit.

What are the lessons that can be learned from this reality?

Maybe retired people should not have their money in a bank deposit when interest rates are low and perhaps property investors should not borrow money to buy property when interest rates are low. While this seems obvious, how can it be put into practice?

For those planning to buy property, the very best time to borrow money for the purchase is when interest rates are at their highest point in the cycle. Firstly, this will represent the highest level of monthly payments required to service the debt, meaning that you know that you can afford the debt. And secondly, the property purchased will be at or near its lowest price. Things can only improve as interest rates begin to decline as the cost of the debt will decrease while the value of the property will increase.

Pearse is not recommending an investment in SA property yet as income yields are still low, making current valuations unattractive, however putting property on the radar screen is sensible as interest rates are possibly nearing the peak. International property is more attractive at yields around 6.5%, however property tends to lag the equity cycle which has yet to turn positive.

For retired people who enjoy high interest rates, but suffer when they decline, a similar argument holds. When interest rates are at the peak, it is the time to switch the bank deposits and money market funds into real assets like commercial property and government bonds. These asset classes produce steady income streams which do not fall as interest rates decline. In addition, their capital value rises as interest rates decline.

A period of high interest rates, particularly when the peak is reached, is the time to consider investing money, whether you are buying your first home or securing a reliable income for retirement.