Investments paying interest
Lend money, earn interest
Investments that pay interest are often seen as safe
investments. But some types of interest bearing investments may not
be as safe as you think. Here we describe different types of
investments that pay interest and when they may be right for
We also explain the advantages of investing your money with a
'prudentially regulated' institution.
paying interest work
What you are really doing is lending money to a company,
financial institution or government and in return you receive
Investments that pay interest can differ in the following
- Floating rate - the interest rate can change
over the term of the investment, usually in response to changes in
- Fixed rate - the interest rate is set and will
not change over the life of investment
- At call - you can access your money at any
time (although some products may require a day or two's
- Fixed term - your investment is for a specific
length of time
Listed and unlisted investments paying interest
Simple investments like term deposits are unlisted, you invest
directly with the financial institution.
Some of the more complex interest-bearing investments such as
debentures, unsecured notes and mortgage funds are also unlisted,
which usually means you deal directly with the product issuer and
they cannot be traded on a secondary market. This may mean they are
less transparent and harder to sell.
When interest-bearing investments like bonds or capital notes
are listed, they can be traded on an exchange such as the ASX,
which makes them easier to value and buy and sell.
Read more on investments that pay interest:
Risks can vary
Just because an investment promises interest doesn't mean it is
safe. Investments vary from the very safe, such as a savings
account or term deposit with a major bank, to the very risky, such
as unlisted unsecured notes.
You need to examine a product carefully, and not be swayed by
the name used to describe the product.
For example, a 'secured note' does not signal a safe investment,
it means that the issuer has provided some form of security to the
trustee of the note issue. The product is not guaranteed, and there
is a risk you could lose some or all of your money.
The Australian Government has guaranteed deposits of up to
$250,000 in Authorised Deposit-taking Institutions (ADIs) such as
your bank, building society or credit union. This is called the
Financial Claims Scheme (FCS) and it means your money, up to the
stated limits, is guaranteed if anything happens to the ADI. This
would apply to products such as savings accounts and term deposits
but not to other riskier interest-bearing investments. Find out
more about the government guarantee.
Check if the company is regulated
Check whether the company is regulated by the Australian
Prudential Regulation Authority (APRA). It won't guarantee your
money, but it does at least mean the company has a higher level of
APRA regulates banks, building societies, credit unions, life
insurance companies and superannuation funds (excluding
self-managed super funds).
APRA licenses and monitors the financial soundness of the
institutions it regulates, which gives you a higher level of
protection than with unregulated entities. It has a list of regulated entities on its website as
well as a disqualification register, so you can check that the
entity you are dealing with is licensed.
Higher returns, higher risk
Higher returns usually mean there is a higher level of risk
involved. You may lose your money if:
- the borrower doesn't pay you the interest on time
- the borrower can't pay back your capital when it's due
When interest bearing
investments are right for you
Different investments paying interest are suitable for different
- Bank accounts and term deposits -
suitable for holding emergency funds, money you are planning to
spend in the next few years, proceeds from the sale of an asset
that you intend to invest again soon.
- Debentures, secured products and listed
investments - you want a secure income stream with
interest that's higher than your bank is paying, or are looking to
diversify your portfolio. Products vary in risk considerably so
read the prospectus or PDS carefully to understand the security
being offered and what your money will be used for.
- Unsecured and unlisted products - you
want to diversify your portfolio and are willing to take on more
risk in exchange for higher returns. The risk of these products can
also vary considerably so make sure you know exactly what your
money will be used for, and understand the risks, before you
Not all investments paying interest are suitable for all
purposes. Just because an investment is paying interest does not
mean that your capital is safe or that you are guaranteed to
receive interest payments. You need to understand the nature of the
investment and the risks associated with it.
Some types of investments paying interest
are relatively safe and others can be quite risky. It's very
important to do your research before you invest in some of these
products. Seek financial advice if you are
Last updated: 10 Dec 2018