28 Aug Term deposits and other bank products
So, you’ve saved for a house deposit, and all of a sudden you have options to consider. Where should you buy real estate? Should you buy a house or an apartment? Are there better investments out there?
Everyone will tell you what you should do, and the answer is not as clear-cut as you may think.
For the sake of this article, we are going to assume you are looking for growth over a 10 year period.
Term deposits are a that offer banking product that offer a better rate of return than a savings account. Banks will often ask for additional commitment to gain access to this slightly higher rate, and there can be stiff penalties for getting your money out early – including forgoing the rate itself. The benefit is a consistent rate of return over a term of between 24 – 60 months, with the interest paid on maturity, in other words, not until the term is complete.
Rate of return – the highest rate found at time of publication was 2.85% over 60 months with an investment of over $100,000.
Shares and stocks are partial ownership of the company through stock exchanges. Simply put, you purchase a share in the company at a set rate – say $1 and if that value goes up, then you profit. If the value goes down, then you take the loss.
Estimating the expected rate of return can be a bit difficult, the following graph is from Bloomberg and is taken from the ASX website, and shows that returns can be inconsistent, which is the biggest problem with the sharemarket.
When averaged out, most analysts will claim around a 7 – 8% return over an extended period. Of course, this generally involves investing your money with a certain company and hoping that when you want to get it out, the stock is up and not down.
Rate of return – extremely variable, and not stable. But assuming you are investing within the ASX200 and don’t experience any significant market corrections, around 8%.
Just leaving your money in a savings account can mean that over an extended period you actually lose money. For example, at publication, the average rate of return from a savings account is 0.06%. The current rate of inflation (the increased value of products and decreased spending power of money) sits at around 1.7%. Over 10 years, the increased value received from the savings account would be swallowed by inflation – you’d be able to buy less with your money. This is an important point – in order for a long term investment to be viable, it must be higher than the rate of inflation, otherwise you’ll end up with slightly more money, and less buying power.
Rate of Return – Less than 0%
Real estate remains the solid choice for long term investment. Over an extended period, property will statistically increase in value regardless of market corrections, and most importantly, it’s a tangible investment you can touch and feel.
As real estate increases in value however, the old adage remains true – the best time to buy is yesterday, and the second best time is today. Why? Because of this –
Australian Residential Property Price Index; Weighted average
Source – globalpropertyguide.com
This graph shows percentage growth across Australia’s capital cities averaged out. It means that growth has remained – when considered from a price standpoint – incredibly consistent over an extended period of time. Of course, these numbers fail to take into account local regional scenarios such as small mining towns and industry-based areas that may have suffered as a result of the manufacturing decline, but when purchasing in major cities in Australia, the statistics tell us that you can be optimistic about the results.
Rate of Return – It’s always better to be conservative. The real estate property cycle generally lasts around 7-10 years, and over this time you, based on statistics, should allow for around a 75% gain in the value of your property. Again, some areas will experience more and others less and if you would like to talk to us more detail about where to buy, please reach out to us here