Don’t get too giddy now, but exciting news comes from Bank of Ireland; finally realising interest rates don’t just apply to mortgages it has generously bestowed 0.5pc to depositors – for the first time in many years. It’s not even the best rate! Permanent TSB will give you a whopping 1.5pc, with certain conditions.
It’s all reflective of the relentless announcements from the European Central bank on interest rate increases, on which borrowers are feeling pain, and while banks are very quick to pass on rate rises on loan products, they are slower to acknowledge that loyal savers also deserve a return.
In fact, banks do like depositors, but only to a certain extent. While they provide a cushion against the money they use for lending, loans remain a liability on their books. If every single person turned up asking for their cash to be paid out – which happens during a Bank Run, if you’ve ever seen “It’s a Wonderful Life” at Christmas – most banks would struggle to pay them all in one go. Money is there to be lent, and that is the reason why, bar Tracker mortgages, borrowers on variable rates haven’t yet seen too much activity on their repayments.
If you’re a depositor – and Irish people are great savers, with over €130 billion in savings accounts, post offices or state savings products like prize bonds – it might finally be the time you’ll start getting a return.
So, what’s out there and where’s best to put your cash?
Inflation Running between 8 – 9pc it’s a massive cost to money. It eats into spending power, and means the money you have today will buy less stuff next year. Until it comes down – ideally to 2pc - that will continue. During a cost of living crisis, everything costs more, but your money is worth less.
‘Monetary policy’ or increasing interest rates, is the only real tool banks have to dampen down spending, and they will continue with it until it works.
Rainy Day More than four in ten Irish people vowed to ‘save more’ as a new year resolution according to the Taxpayer Sentiment Survey from Taxback.com, who noted, “What this survey suggests is that while the rate of Irish household savings has fallen in recent months, the level of savings is still high compared to pre-pandemic rates. Before the pandemic, Irish households saved around 10pc of their total disposable income, so [the current] 19pc is still well above the long-term average”.
While most people have savings and borrowings, we tend to hang on to the former when we think things may get worse. It’s our ‘rainy day’ mentality. While there’s nothing wrong with this approach, having high interest bearing debt, like credit cards, makes little sense when you have savings earning nothing. You’re better off paying off the card.
Other Options Marc Westlake, Certified Financial Planner with Everlake, says people often ask whether it’s a good idea to pay down the mortgage with savings.
“If you have a large mortgage payment relative to your disposable income, than it can make a lot of sense”, he says. Although we don’t know where interest rates will end up, 3pc (or even 5pc) is seen by many economists as ‘normal’. “Rates have been 8.18pc on average since 1975”, says Mr Westlake, so the current policy of the ECB is not a short term measure.
“If money is tight now with historically low interest rates you are probably going to struggle if mortgage rates were to increase and therefore, all things being equal paying down debt will save you interest at the average prevailing interest rate over the remaining term of your mortgage (rather than just at the rate today)”.
Future Proofing While pension contributions must come from ‘earned income’ to qualify for the generous tax relief on offer, you can do this via an Additional Voluntary Contribution (AVC) in a company scheme, or a personal pension for the self employed from salary.
As long as you are under the contribution level for your age and income, it doesn’t really matter that the investment itself comes from a deposit account rather than directly via payroll. Check with your employer on how best to facilitate it, or a financial broker.
Mr Westlake offers an example: Mary earns a bonus of €20,000. Her mortgage is 4.1pc APR with 25 years remaining. Her options are to pay the bonus into her pension scheme, or take it, pay the tax and reduce her mortgage.
Taking it leaves Mary with a net €9,600 to reduce her mortgage, saving her €15,744.47 over the remaining term of her loan. Compare this with paying the bonus into her occupational pension, which would be worth over €60,000 in 25 years. “The tax on the bonus is deferred – an interest free loan from Revenue”.
How hard has Brexit hit Ireland?
Britain has taken “huge strides” in taking advantage of the opportunities opened up by Brexit, Rishi Sunak announced last week, on its third anniversary.
The British prime minister added that the country is “confidently forging a new path as an independent nation”. His view can at best only be considered fanciful, at worst, delusional. Brexit has been an abject failure.
But marking its ongoing fallout makes it our problem too, so I thought I’d take a skip through what’s working, and not, for Ireland since the UK market devolved from its European family.
On the plus side, we are not so reliant on UK trade as we were. Bolstered by EU finances, we are a stable economy by comparison. While we are reliant on much of our energy through the UK, this is also stable, because they need it just as much. We also rely on a Norwegian supply and have more renewables than ever before.
Medicines are also stable, if a little congested. If you need cross-border treatment, you can get it in the North with little impact. Mobile roaming charges are not (yet) enforced, but may be, along with hospital charges, in the future. If you’re driving to the UK, your Irish licence is accepted; not so the other way around.
The big difference is for shoppers. Importing from the UK means Vat added to everything and customs duties for certain items. The best advice remains not to bother, whether it’s a car or a pair of shoes – there is simply no more saving for most goods. Shopping local is better.
Crytocurrency is a mug’s game
The governor of the Central Bank, Gabriel Makhlouf, has been unusually strident about cryptocurrency, and the “uncomfortable” level of ads aimed at young people through social media.
Such products, without an underlying asset to back them, are little more than a giant Ponzi scheme, he said, and has warned that people “investing” in cryptocurrency should be “prepared to lose all their money”. He called for a ban on such promotions. I agree.
Crypto is a mug’s game. Readers may recall that I tested the market over a year ago, buying seven such “coins”, including Bitcoin and Ethereum. The stock is now worth a fraction of what it was; in fact, the cash I held in reserve is now worth more, and that’s with rampant inflation eating into it.
