5 alternative ways to invest your savings
If your money is collecting cobwebs in a bank account, why not explore some property-related investments. Sinead Ryan reports
Published 01/05/2016 | 02:30
With €96bn on deposit in Irish bank accounts, you'd be forgiven for thinking that the returns are second to none. In reality, they're just none.
Negative interest rates, already a reality in Switzerland, Denmark and Sweden, where savers are charged to keep their money on deposit, may well happen here. Already, the European Central Bank charges Irish banks -0.4pc for their deposits.
With returns averaging 1pc a year if you're lucky, and 41pc swiped in onerous DIRT tax, surely there's a better home for your money. We're looking at five.
Pay off the mortgage
Overpaying your mortgage can cut interest and time - €25,000 off a 25-year loan of €250,000 at 4.5pc cuts four years, three months and almost €45,000 off the loan. It's effectively doubling your money.
Frank Conway of the Irish Financial Review says it doesn't just apply to lump sums. "The sooner you can repay your mortgage, the more you will save.
"If you had a 30- or 35-year term, to keep your repayments more manageable at the beginning, channelling extra cash into it is a great idea. A €300,000 mortgage, at 4.5pc over 35 years, results in monthly repayments of €1,419.77. Bringing that up to €1,667 would result in €96,054 savings over the interest term."
He adds that you should check with your bank as they may not allow overpayments on a fixed-rate loan until it's out of that contract, for example.
Even paying down personal loans is valuable, as they all charge a higher rate than you can make on deposits.
You'd need to be making 7pc a year in interest on your money to justify not paying it off a personal loan with a 14pc interest rate.
Buy a plot of land
Land prices are climbing again, in line with property prices, but they're not always as buoyant as people think they are, says Mark Reynolds, head of Development and Consultation at Savills.
"Buying land in agricultural use will hold its value as long as you don't overpay in the first place. Buying it beside an area already zoned for development is the way most people try to profit. It's that field near the housing estate which may be built on in the future.
"People sometimes think it's automatically set to make them a fortune, but that may not be the case. Keep an eye on development plans in the area, they're reviewed every five to seven years.
"Ask for your land to be considered for development regularly. Realistically, the core amount of money you spend should be relatively safe, if you're prepared to sit on it.
"Even if it remains zoned as agricultural, you can hopefully get your money back; if it gets rezoned, you can make a profit."
Forestry is the secret investment. It is badly needed and the Government provides generous supports in grants and tax relief. Currently just 11pc of Ireland is under afforestation; the EU average is 36pc.
Species like Sitka pine and Norwegian spruce grow three times faster here than in Scandinavia and faster than any other part of Europe. Steven Meyen of Teagasc says more forestry is needed due to timber demand and our climate-change obligations.
According to Paul Brosnan of Irish Forestry Funds, the tax incentives are still generous, "Even when they cut child benefit, tax breaks on forestry were retained."
However, these days, investors are generally landowners, farmers or high net-worth individuals as many of the funds for smaller or amateur investors have closed, given the tighter regulatory environment.
Brosnan's company runs 19 forestry funds for 12,500 individual investors, but says "the time for the small investor is past". Instead they concentrate on those with over €100,000, given the onerous paperwork required.
"When you buy forestry, you have a contingent liability to keep it as such in perpetuity. This is not a transient investment for five years." The Government offers grants to plant the trees once a licence is secured from the Department of Agriculture, and the land purchased by the investor.
"We plant mainly commercial species and there is a chronic shortage of it," says Brosnan. The investment is free from income tax and, to a large extent, capital gains tax. "It would be ideal for someone in their 30s with a good bit of money who is looking for an alternative investment for retirement."
Some pension funds offer indirect products, such as Standard Life's range of green funds using Exchange Traded Funds via an Approved Retirement Fund (ARFs) which include Global Timber and Forestry. There is no special tax treatment except the normal generous tax relief ETFs enjoy.
Become a doer-upper
Investing in your own home is a great idea, thanks to the Home Renovation Initiative, which gives a VAT refund of 13.5pc on qualifying works - anything from kitchens to landscaping to extensions. To date, 54,191 works in 37,534 properties have been undertaken, with an average value of €15,618. The limits on relief are works costing €5,000-€30,000 and the refund is made monthly over two years. You must use a registered, tax-compliant contractor.
Michael Gaynard of Ardco Construction says: "The three main additions that add value would have to be bedrooms, bathrooms and extended kitchen/dining area. Cost-wise, the cheapest way can often be to convert an attic or garage space.
"There is also the element of sometimes avoiding the cost of planning permission for an attic/garage conversion as these are often deemed exempt (although not always, see our Architect's Clinic, page 8).
"An extension can vary from some additional room in a kitchen at the rear of a property to two/three storeys with basements.
"A well-completed extension incorporating additional bedrooms, bathrooms and a new kitchen/dining area will add significantly to a property's value.
"Basement constructions are fast becoming the new go-to area after being popular in London for some time.
"You are adding to your footprint without eating into your garden space. It is, however, the most expensive form of extension, so you do need to do your homework to ensure you will see the value of these works back, but they can create an amazing additional space to a previously smaller area."
Property in Europe crashed after the boom, like most other investments, leaving investors nursing losses. But, time moves on and the property market is making a resurgence for those brave enough to take the plunge. With house prices rising here and short supply, perhaps the best bargains are to be had outside the borders.
The latest OECD research shows that many popular markets are still under-valued, including Spain, by 26pc, and it grew by just 1.2pc in 2015 due to over supply. Spanish banks, like ours, are eager to offload their books, often at a discount.
Portugal, particularly the Algarve, is also recovering. Prices dropped by up to 50pc during the crisis and buyers have been slow to return, meaning there are bargains to be snapped up. Further afield, Moldova is returning 10pc yield, while Ukraine properties are making 9.09pc a year.
Annette Mink of French Prestige Investments says we were far too adventurous with our money in the past.
"People thought it would be a good idea to invest in Shanghai, Turkey, China, Bulgaria, etc. They were buying at exhibitions off photocopied pieces of paper.
"So, the reluctance to purchase again will prevail for some time. Typically, there are two types of investors: one hoping to make a capital gain and one looking for a mixture of investment and leisure.
"European capitals, high value Alpine resorts and Mediterranean tourist locations remain ever popular. Ask yourself if it's a popular destination, accessible, and who will manage it for you. Is there development planned? How stable is the country? France, for example, has no 'swings' in value; it's not going to generate a high asset yield. Check if the law is landlord and tenant friendly and what advice you need. Of course, the rental yield is important, along with the capital appreciation."
French Leaseback is also making a comeback, despite some investors being stung by management companies going bust in the last few years. Mink says some French banks had been ruthless dealing with indebted Irish customers but leaseback is an investment that can represent good value in the long term.
"It gives you the right to use the property for short-term tourist rentals over a period of nine, 11 or 18 years. You receive in return, major tax breaks from the French administration (19.6pc VAT) as well as a guaranteed rental income for the duration of the contract from the management company which varies between 3-4.5pc depending on the development."