Interest rate cuts are beneficial for anyone paying a mortgage. But for depositors ranging from bank accounts and term deposits to short and long term debt facilities, every rate cut makes it harder to make ends meet.
According to the Commonwealth Bank, 64 per cent of its funding comes from its depositor base. It allows banks to maintain their margin despite the record low official cash rate of 1.75 per cent. This means that if you pit $100,000 in a term deposit for six months, you will only earn around $44 a week. Hence, it is not surprising that many have gone to the share market as the cash rate continues to fall.
Exchange traded funds (ETF) and managed funds are one way to diversify your risks. Instead of putting all your money in one stock, ETFs lessen the possibility of this one stock putting a gaping hole in your portfolio. Income ETFs are also on the rise, as these funds focus on generating income where capital gains are less of a goal.
Since no one is expecting the cash rate to rise anytime soon, it is almost certain that the popularity of both ETFs and income ETFs will continue to surge. But before you invest in any of them, take some time to check out their investment strategy and the shares they hold. You should also check out the fees involved as management fees can put a real dent in your total returns. Finally, make sure that you understand the product before you invest.
With interest rates at their lowest for more than 50 years, there are some great rates available. The best thing to do is to compare rates from all the lenders. Let us help take the leg work out of doing this - Compare Home Loans now