Sat | May 25, 2019

Oran Hall | Sensible returns at low risk

Published:Sunday | March 17, 2019 | 12:19 AM

ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

QUESTION: I am seeking your advice on how to best invest $750,000, which I have in my credit union. I have been working for over 13 years in my current job. I have been saving an average 10 per cent of my salary in my credit union's Golden Harvest account since 2006 to present. I am 35 years old now and my only other asset is a motor car valued over $900,000. I have a six-year-old son and a spouse.

I need a house at this time, but find it difficult to find one that is located in a decent area and of a reasonable price. So, I am considering using my cash to purchase a lot and build on it with a loan from the NHT. Until this is possible I wish to invest my money in something that will give me a sensible interest at low risk. What advice can you offer?

- H. Reid

FINANCIAL ADVISER: You have taken several positive steps to realise one Jamaican dream – home ownership – but it seems that you will have a challenge doing so. It is not going to be easy to accumulate the required funds but you should not give up.

I like the fact that you have been saving a set portion of your income over a sustained period although the amounts have not been substantial. Neither have the rates been significant. One of the goals of the Golden Harvest savings account is to enable members to own a home, but the reality is that it requires a fair sum to own a home.

Generally, credit union members are required to save their funds for at least five years in the Golden Harvest account. In some cases, members can save for up to ten years. The rates on this account are not very significant as I have not identified any credit union that pays more than six per cent per annum.

The account comes with some sweeteners like insurance protection of the savings such that the beneficiaries of members can access the full savings goal up to a maximum amount in the event of premature death or payment to the saver in the event of permanent disability. Members may also use their savings as collateral for loans.

Those hardly compensate for the limited ability of members with low income to borrow funds for a major acquisition such as a home.

The rates paid on the Golden Harvest Account compare favourably with rates on interest-earning instruments in the market and it would cost you heavily if you opted to withdraw the funds before the expiration of the contract period. In such a case, you could lose up to 50% of the interest earned.

I can understand why you are not inclined to take much risk with your money as it is important to secure what you have. I can also understand why you would want to get a high return on your money, but the two do not go together.

If you want a low risk instrument, you should expect to get a low return. To get a ‘sensible’ return, you will have to embrace the more risky investment instruments.

The problem with them is it could be some time before you realise the level of returns that make sense to you although you could also make reasonable returns in the short term. You should also recognise that such instruments could do poorly in the short term.

Land prices tend to appreciate steadily especially if the land is in the more desirable areas, so it is better to buy land now rather than later but you would have to consider the expenses associated with it.

It seems you would need more that the $5.5 million maximum available from the National Housing Trust to build, but there is no guarantee you would qualify to borrow that sum considering that how much you can borrow depends on several factors including your ability to make the monthly mortgage payments.

You have not said if your spouse works and contributes to the National Housing Trust. That would make you qualify jointly for much more than you alone could borrow.

It is going to be challenging to achieve your goal of home ownership and your leaning towards constructing your own home seems a sensible course to take, but it could be challenging to source land in a reasonable location at a price you can afford.

Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

finviser.jm@gmail.com