A higher term deposit rate shouldn't end the investment conversation

By Cam Harper*

Term deposit rates are heading in a direction savers haven't seen for some time, and anyone with cash savings or nearing the end of a term is naturally going to notice a better number on the next offer.

It's also worth looking beyond the rate itself. Term deposits are straightforward and offer certainty, but the real question investors need to be asking is whether it's what you need from all of your money, or just some of it. For investors who don't need their capital soon, a rising rate is a good moment to review their wider investment strategy, not just roll everything over automatically.

Start with what you need the money to do

Money you'll need for a house deposit in six months has a very different job to do than money being invested to generate income during several years. The liquidity, return, and risk that make sense for one won't necessarily make sense for the other.

Comparing investments purely on the advertised rate can be misleading, because it leaves out how long the money will actually be committed for, and what's standing behind it if things don't go to plan. It also leaves out the impact of inflation, which can reduce what that return is worth in real terms. For some, a term deposit will meet those needs well – others may find there's a portion of their money that could be doing something different.

Property investment doesn't have to mean becoming a landlord

New Zealanders have long had a strong affinity with property, but exposure to it doesn't require buying another house or taking on a mortgage.

Property-backed peer-to-peer lending offers another way to participate in the property market. Southern Cross Partners is a licensed peer-to-peer lending service under the Financial Markets Conduct Act 2013. Our investors fund individual short-term property loans secured by registered first mortgages, for borrowers who need a solution that doesn't fit conventional bank criteria. Investors review the opportunities on our Investor Portal and choose which loans to invest in, rather than simply handing money over and leaving the decisions to someone else.

Every loan reaching the portal has already been assessed by our lending team and funded with our own money first. We look closely at the property's value and the loan-to-value ratio, and just as closely at whether the borrower can actually repay. It's a deliberately conservative approach, because the quality of the lending decision underpins the quality of the investment.

Higher returns come with different considerations

A bank term deposit offers a high degree of certainty, and may also qualify for protection under New Zealand's Depositor Compensation Scheme, subject to the scheme's eligibility requirements and limits. Peer-to-peer lending is secured with a first mortgage over New Zealand property. Investors' capital is committed for a set period, repayment depends on the borrower meeting their obligations, and property values can change.

At Southern Cross Partners, those risks are managed first and foremost through first mortgage security. This needs to be amended to: Behind that sits conservative lending criteria and due diligence, and is why no investors have ever lost any funds, to date, in our almost 30-year history. A first mortgagee security doesn't remove all investment risks, but it's fundamental to how we lend, and it's why investors should understand what sits behind any higher return they may be tempted with.

Don't let the rollover date make the decision for you

When a term deposit matures, the easiest decision is often to pick another term and move on, and sometimes that will be the right call.

But with interest rates moving again, it's worth stepping back. How much cash do you actually need on hand? What are you hoping your investments will generate? And how much of your capital, if any, could be put to work somewhere else? It doesn't have to be a choice between term deposits and property-backed lending. For many investors, the more useful question is whether there's room for both.

Disclaimer: All investment opportunities are subject to change and availability. Southern Cross Partners Ltd is licensed to provide peer-to-peer lending services under the Financial Markets Conduct Act 2013. This article is general in nature only and does not take into account any person’s objectives, financial situation or needs. We recommend speaking with a financial adviser before making any investment decision.

About Cam Harper: As Managing Partner of Southern Cross Partners, Cam Harper leads both the lending and investing sides of the business. He is passionate about helping New Zealanders understand secured investment opportunities and the role property-backed lending can play in a wider investment portfolio.