Property Institute says lower interest rates may hurt retirees

Property Institute of New Zealand Chief Executive, Ashley Church, is calling attention to the impact of a sustained drop in interest rates warning that they will have a negative effect on those who rely on interest as income – particularly retirees.

Mortgage interest rates are currently falling as a result of low inflation and cheaper international funding sources. Experts are predicting that they may have further to fall and that the lower rates could be around for years.

However, Mr Church says that while this is great news for house buyers – and will provide welcome relief for struggling first home purchasers – it is bad news for those who rely on the interest income from investments.

“For decades, Politicians and State agencies have been telling people to put aside enough money to provide them with an interest earning nest-egg to supplement their Government-funded superannuation. But a low interest environment means that depositors will now be paid less on the funds they have invested”.

He warns that this will reduce the amount that many retirees have to live on.

“This is the same as getting a pay cut – except, for most retirees, there are few options for making up the difference”

Mr Church says that this may lead many retires to start spending the nest-egg itself.

“The temptation to eat into your capital to make up the difference in interest income will be huge for some – but it’s an ever decreasing circle and risks wiping out your retirement savings over time and reducing your ability to leave something to your loved ones in your will”.

Mr Church says that some may choose to negate the effect of interest rate cuts by investing their nest egg in the property market – and he notes that there are sound reasons to do so.

“During property booms – such as Auckland and Christchurch are experiencing right now – capital growth can exceed 10% per annum. That’s going to be attractive to retirees who generally earn far less than that on a bank deposit”.

He notes that rents also tend to increase over time.

“Even in the periods between property booms - rental property provides a reliable and sustainable form of slowly increasing income”.

Mr Church is encouraging retirees, and those nearing retirement, to take professional advice on the potential impact of interest rates cuts on their retirement savings.

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