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Insight: How to generate income in a falling interest rate environment

Pierce Hanlen
Private Client Adviser
11 May 2020

In our experience, medical professionals often have the ability to generate high levels of income. Where this is the case, quite often excess cash flow is used to invest in property and other growth assets. While this can be a great way to accumulate wealth over the long-term, it is also important to invest in assets that generate regular and reliable income as this nest egg will eventually fund your living needs.

The Reserve Bank of Australia (RBA) made an emergency interest rate cut to 0.25% (from 0.75%) in an effort to continue economic stimulus during the COVID-19 pandemic. When interest rates decline it can directly impact the rate of income that investors can generate from their fixed interest assets, and we are certainly fielding these exact questions from our clients at the moment.

So, how can you still achieve the ‘sleep-at-night factor’ by generating strong, reliable income without taking on unnecessary risk? From our perspective, it generally requires building your fixed interest exposure with more focused and productive income-producing assets.

I am covering a few investment types that could help you start thinking about your own situation and how they could help you achieve financial freedom, but it is important to seek advice from an independent professional to ensure you are investing in line with your own goals.

What is your total return made up of?

Your total investment return is made up of two components: income and capital growth.

Some investments only provide an income return (such as term deposits earning interest), some only provide capital growth (such as property development projects) and some provide both income and growth (such as a share in a company that pays income through dividends as well as provide the opportunity to grow in value). While both components are crucial to the success of long-term investing, I am focusing on assets that only produce income.

Fixed Interest Investments – those that only provide income

We often have new clients approach us for help managing their investment portfolio and what we notice is the majority of their fixed interest exposure is invested in Term Deposits (where banks borrow your money to lend to others at a higher interest rate for a set period). While they have their place in the investment universe and are guaranteed to return your initial capital, they no longer provide the income that they used to with interest rates so low.

Here are some other types of capital secure investments that could provide much greater income, and they all involve ‘lending’ your money to others, whether they be companies or individual people.


When a company needs to raise a substantial amount of money, they can issue bonds. This is when the company borrows money from you and pays you a ‘coupon’ (basically an interest rate) in return. Your initial investment is then repaid when the bond matures.

The global bond market is the largest market in the world. It is the main way that the world’s biggest businesses raise capital and are also some of the first types of debt that get repaid if the company runs into financial trouble, making them quite secure. Traditionally, bonds have been difficult to invest in as parcel sizes are typically $500,000, but recent technological advancements have opened this market to everyday investors meaning you are able to access bonds in much smaller parcel sizes. You could expect to receive between 2.5% and 4% from bonds issued by companies with strong credit ratings.

Corporate debt

There are thousands of quality companies in Australia that need to borrow money from time to time for a range of reasons; from expanding their business to updating existing equipment to stay ahead of the game. By lending to these companies, you could expect to receive upwards of 4% per year of income. The higher expected income than bonds is generally due to a slightly higher level of investment risk (still a low level of risk if managed properly).

Secured first mortgages

Like term deposits, secured first mortgages involve investing your money for a pre-determined amount of time, and in return, the borrower pays you interest. Essentially, a mortgage is taken over a property (typically a residential property, but sometimes commercial) at a specified Loan to Value Ratio (LVR). The higher the LVR, the higher the risk. The term of the loan is generally 12 – 24 months with interest paid monthly. The expected rate of return could be around 7% per annum.

Our business has been using secured first mortgage investments to generate strong cash flow for our clients for over 30 years and is very experienced in selecting quality mortgages to achieve a strong outcome for our clients.

Where to from here?

If you manage your own affairs, I encourage you to do some research on the opportunities available. However, we also understand that as a medical professional this is unlikely as you are time-poor. A good start is speaking to a financial adviser to identify if any of the above opportunities could be appropriate to include in your mix of investments. At Hewison Private Wealth we have been utilising these investments and more to enhance the income generation of our clients’ portfolios. Feel free to get in touch if you would like to know more.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.