Cut makes it riskier to invest for a living

Reserve Bank Governor Alan Bollard. Photo / Mark Mitchell

People who depend on interest from their investments for their income may need to take more risks to survive after yesterday's cut to the official cash rate.

ABN Amro adviser Mark Lister said he had spoken to investors who barely a year ago were making up to 9 per cent on investments but were now receiving much less.

Until recently, investors had the luxury of good returns from low-risk investments such as banks, but there was now "no real escape from having to invest in something with more risk".

Reserve Bank Governor Alan Bollard yesterday dropped the official cash rate by half a percentage point to a record low 2.5 per cent and said he expected the rate to stay around that level until late next year.

The rate is expected to fall further, to 2 per cent, within that time.

Banks were yesterday slow to react to the cut. At 5pm, only Westpac had reduced its interest rates, cutting the rate on six-month fixed-term mortgages 0.4 per cent to 5.49 per cent.

Mr Lister said corporate bonds from "good-quality companies" were a good-paying option for struggling investors, but it meant their savings were at the mercy of the stability of the business.

"If the company runs into trouble, and can't pay the debt back, that's where the risk lies," he said.

"If you want the very-low-risk option, the price you pay is a much lower return."

The sharemarket was another investment option, the risk being "the price you pay for a more-attractive return".





Massey University banking expert David Tripe said now could be the time for financially-stretched mortgage holders to look at getting out of their fixed-term mortgages.

Breaking the mortgage contract could mean short-term savings, "even if it means pushing capital costs up a bit".

Those approaching the end of a fixed-term mortgage should investigate getting out early, as the cost would be comparatively low.

Dr Tripe agreed shares or corporate bonds were an option for hard-pressed investors, but warned speculators to research the topic first - and seek independent advice.

"If something is paying more, it's because it's riskier."

And economist Gareth Morgan counselled caution to investors - particularly older ones - tempted to gamble on riskier investments.

"It's quite important that people don't say, 'I am getting gutted here', and go coupon clipping in the Sunday papers for the highest yield of the day."

Older people should stick with bank investments, or Government stock, leaving riskier ventures to those who could afford to take a loss.

And he said anyone who wanted to break their mortgage would find that the banks would "charge like wounded bulls".

- NZPA