Advisors.ie

(full Sun on Sunday piece available here) I do my best to help you with your money concerns, and that is why this week I want to teach you how to ‘beat the bank’, it’s time to turn their tricks back against them Firstly, look at the way the banks hit you for your cash.

They’ll charge you 4-5% on a mortgage, they’ll charge between 11% and 19% on credit cards, 10% to 14% on personal and car loans. Or they buy bonds issued by countries because they don’t have to put aside capital reserves when they buy these and they’ll make 6%.

Yet what they PAY you to use your money to do this is either zero or below 3% in general. Meanwhile the mortgage market is starved of credit – it’s o.k. If you have a permanent civil service job, huge savings and a big downpayment, but for the majority of applicants credit is not forthcoming.

If you are in negative equity the banks are only going to offer you another deal if they can reprice the bulk of your loan (this is a tactical move by them) and you have huge income, but in general they are restricting credit in order to de-leverage (or ‘get smaller’). And thus most of the banks money goes into the bond market rather than productive loans.

Why can’t regular people do something like that? They can, you just need to do what the bank is doing, and I’ll show you how. The whole deposit market is set to make you poorer and the banks richer, as I said, a massive sum of money is getting 0% (mainly money in regular current accounts), if you don’t keep enough in the bank you’ll probably have to pay fees now, most recently Bank of Ireland demanded that you have €3,000 in your current account earning no money or you’ll have to pay fees.

Even if you get a 4% deposit rate, you still pay 30% tax on that. So you end up with 2.8% at a time when inflation is 2% meaning you are only getting 0.8% ahead every year! You don’t have the ability like banks do to change the rate you charge borrowers (banks do this with mortgages regularly), but a bank is actually your debtor when you put money on deposit so the sensible thing is to stop placing deposits with them. Don’t give your money to institutions which don’t have your interest at heart and where they play by a different set of rules than you have to.

This is the conundrum, banks will make 5% on your money but you can’t get anywhere near that with them. Banks are making more money on deposits they have than almost any time in living memory. So to start with stop using bank deposits, instead buy stocks, bonds or some other asset – a sovereign bond (issued by a nation) is a safer bet than any individual Irish Bank. Bank deposits are a farce, and they aren’t safe because inflation will eventually return especially with the Federal Reserve and ECB willing to ramp up money creation to the point of no return.

How do you buy bonds? You could buy Irish bonds via a stockbroker, one of the biggest gains out there was for people who bought Irish bonds in 2011 when the yield (interest) was 14%, this has since come down to below 5% – which means the capital value of the bond has shot up! And on our own national bonds the gains are TAX FREE!

You do have to pay tax on the interest, but you’ll do better than where banks are headed, and you could also use a pension (getting a generous tax break in the process) to buy a bond fund where interest and gains are all tax free – you just pay when you take the money out later. Then there are Post office Savings Bonds, you’ll get 10% after 3 years (which is 3.23% tax free, that’s the equivalent of 4.61% on a regular deposit!). You could buy preferred stocks, dividend stocks or corporate bonds (bonds issued by companies like McDonalds or banks).

The point is, banks want to get deposit rates down below 1% and they want to charge you over 5% don’t let them do it! You could let Santander borrow your money (as a bond rather than a deposit) and get 4.82% which they won’t offer you on deposit! We’ll cover more of this in coming weeks, if anything else, just make sure that you beat the banks and don’t let the banks beat you! I’d also like to say a special thanks to Owen Callan, a senior dealer at Danske Markets for his help with making this article.