If so, I can't quite fathom why EVERYBODY isn't doing it. Including the Government.
Even allowing for tax, it seems to me it would be money for jam?
Comments? Or am I missing something obvious?
A. You know what they say about individual investments, that if something looks too good to be true it probably is. The same applies to investment strategies like the one you propose.
Firstly, we need to take care of tax.
You would be borrowing to invest, so you should be able to deduct the interest you pay, while paying tax on the interest you earn.
If you are in the 21 per cent bracket, that would cut your 2.18 per cent to about 1.7 per cent after tax. In the 33 per cent bracket, it would drop to less than 1.5 per cent, and in the 39 per cent bracket, to 1.33 per cent.
It's not exactly a gravy train.
There would also be a fair bit of hassle to borrow the money and then invest it, to say nothing of expenses, which would quite possibly more than wipe out your gain.
But let's suppose that they didn't, that there was still money to be made, because there's an important principle here.
The same institution - a bank, finance company or whatever - will always pay less on a deposit than it will charge for a loan that runs over the same period.
It has to cover its costs, and also make a profit, or why would it bother?
If, when you look at two companies, the situation is the other way round - with one company paying more on deposits than another company is charging on loans - there can be only one conclusion: the deposit company is riskier.
I don't know anything about Capital & Merchant other than what I've learned from its website (www.capitalmerchant.co.nz). It apparently borrows money from the likes of you, and then lends it to "the New Zealand industry sector".
I'm sure that if Capital & Merchant could borrow from Cairns Lockie for 6.1 per cent rather than from you for 8.28 per cent, it would do so.
Why can't it? Presumably because low-interest lenders like Cairns Lockie deem it too risky.
So how risky is Capital & Merchant?
I looked at www.bondwatch.co.nz, which rates bonds and other fixed interest products, based on publicly available information.
This is not as good as a rating based on in-depth research. But nobody I know of does such ratings in New Zealand.
Unfortunately, Bondwatch rates Capital & Merchant's capital secured deposits "NR", or "Not rated". The main reason an issue hasn't been rated is that "the issuer has less than two years of normal operating history and/or there is limited financial information publicly available".
That's not necessarily bad, but it's not a plus.
Next, your intrepid researcher looked at other companies that, in the May 17 Herald list, also paid 8 per cent or more. If they are paying similar interest to Capital & Merchant, they are probably similarly risky.
Of the ones that were rated by Bondwatch, two had G5 ratings, two G6 and one G7 - on a scale in which G1 is least risky and G8 is riskiest.
Furthermore, Bondwatch gives indicative interest rates for each grade. It says G6 investments typically pay around 7.94 to 9.22 per cent.
We can probably assume, then, that if Capital & Merchant were rated, it would be G6 or close to it.
Here's what Bondwatch says about a G6 rating: "Ability to meet current obligations dependent upon favourable economic and/or business conditions. Concerns about security over the longer term."
That's not to say Capital & Merchant is a bad company to invest in. It will probably pay back deposits. But it's no bank.
So there you have it. If you want to go to the trouble of borrowing to invest, when there might be little or no gain after expenses and there's some chance you won't get your money back, go for it.
But I won't join you.
And I'd like to forestall anyone who is thinking of writing to say, "But what if we do it with an investment that pays 10 per cent? Then it would be worth it."
Bondwatch doesn't tell you the interest each investment pays, but www.interest.co.nz does. If you explore the two websites, it doesn't take long to confirm what we all expected: The higher the interest, the riskier the company paying it.
Sure you might stand to gain a fair bit, even after taxes and expenses, if you borrow at 6.1 per cent and invest at 10 per cent. If the 10 per cent investment delivers. If.
By the way, interest rates have dropped since May 17, following the Reserve Bank rate cut. But that doesn't affect the argument at all.
* * *
Q. I was reading your questions recently and (out of self-interest!) thought I'd add some ideas with regards to the one about getting information about buying shares.
Besides the sharebroker sites there are other sites you could refer people to. One is
Sharechat
(which we now own).
ShareChat has quite a lot of educational material, and it isn't flogging a service like the brokers.
The other unique thing about it - and something which may appeal to the person who wrote the question - is that people can discuss shares and ideas in the forum.
The other point is that there are plenty of educational books out there where people can learn about share investing - as opposed to books offering tips.
We sell lots of these through Good Returns and have found titles such as Making Money on the NZ Sharemarket very popular. The bookstore is at
Goodreturns
.
A. Okay, you get your free ad! I like your honesty, and others will find your suggestions useful.
But I'm not vouching for the quality of anything on ShareChat. I haven't spent enough time on the site. Same with the books. Just because something is published doesn't mean it's good.
* * *
Q. You made a comment recently about not knowing of any reliable index of residential property values. Like you, I know of no robust index or data.
However, it is interesting to note that some Quotable Value data published this year of average values over the past 16 years produced an average annual compound return of only 7.59 per cent. (Commercial property in the same period should be higher despite the disastrous 1987-to-1991 period).
In comparison, over roughly the same time, inflation (tracked on a June-year basis from Statistics NZ) has produced an average annual compound return of 3.69 per cent.
That gives a net real (inflation-adjusted) return of 3.9 per cent, which would be much less if the costs of administration and management were factored in - which they should be.
Even though this is indicative, it conveys a reasonable idea of the net pre-tax and pre-expense returns that could have been achieved. (Note that I do not deduct any amount for tax.)
In the property sector, a rule of thumb is that residential property produces nominal returns of between 3 and 5 per cent, so the above data provides some reinforcement for this "rule".
Obviously there will be variations and distortions, but I do not believe residential property-owners should bank on high returns, which appears to be what many believe they will achieve.
A. You didn't get it quite right. I said I don't know of reliable data on returns on residential rental property.
As far as I know, Quotable Value's numbers on residential property values, without including rent, are fine.
Still, it's interesting to publish your numbers.
I've included similar data in this column before, which led to correspondence back and forth on what it all means. I don't want to re-open all of that.
Suffice to say that recent high and sometimes ridiculous house price rises won't continue indefinitely.
It's good to put it all into historical perspective, so thanks.
* * *
Email us your question about money
Or post it to:
Money Matters
Business Herald
PO Box 32, Auckland
