How do the risks compare between savings schemes?

Q&A:Can you please expound on the difference in the risk for private investors between post office bonds, bank deposits and Government gilts, which would seem to offer very attractive returns at present?

Mr E T, email

Though not necessarily designed as such, it would appear that, for political reasons, all three currently carry some class of a guarantee at present.

An Post savings bonds have always been backed by a State guarantee with the added benefit that returns are free of tax. In the old days – ie, before the financial services sector and governments abandoned the notion of risk management – the idea was that you might receive a lower rate on interest on such bonds than was generally available in the market but that this was counterbalanced by the comfort of the guarantee.

Bank deposits always had some level of cover through the Deposit Protection Scheme. Since the crisis blew up, the level of cover under this scheme has increased to €100,000. For each individual, the first €100,000 of aggregate deposit savings – cumulatively across however many accounts you may have with that bank – in any covered institution is covered.

All high street banks are covered by the scheme or by an equivalent arrangement in their home jurisdiction, although the sum covered may vary slightly. In Ireland, the scheme is funded by the financial institutions themselves though a fund lodged at the Central Bank.

Of course, since the crisis, there has also been in place an absolute guarantee over all bank deposit savings. Though still in place, this requires regular European Commission approval and the intention would be that it is phased out over time. But, for now, it means private investors do not face risk on such deposits.

Government “gilts” are sovereign bonds issued by the State. The name comes from what might now be seen as the peculiarly quaint notion that state borrowings were “gilt-edged” or not prone to default (or at least less so than corporate bonds).

A sovereign bond – ie, government-backed debt – should generally pay a lower rate of interest (or coupon) than a corporate bond. It is seen as a less risky investment, but that does not mean there is no risk attached. The level of interest paid to the borrower reflects the market’s perception of the risk that a government will default. The more highly rated the government, the less likely it is seen to default and the lower the rate offered – hence the importance of that elusive AAA rating. A current look at interest payable on the bonds of Ireland, Spain and Germany will illustrate the market’s assessment of the relative risk of default with each.

Of course, as with deposits, the EU has decided that sovereign default would be too catastrophic to contemplate and has therefore effectively insisted that governments (with the notable exception of Greece) pay their debts. To do this, it has provided bailouts for countries deemed to be in peril, including Ireland.

Rightly or wrongly, the same thinking applies to Irish bank bonds. Thus, as of now, there appears to be little risk to private investors in any of the three classes of savings you present. At some point, presumably, the market will revert to the way it is supposed to operate and risk will exist and be priced accordingly.

How to find a good mortgage adviser

Can recommend some financial advisers re mortgages in the Dublin area please? I have done some searches online and they are plenty to choose from. Can you recommend a couple?

Mr D C, Dublin

I am not in a position to recommend one or more specific mortgage advisers over another. I can see the attraction; as a mortgage is the biggest financial decision most of us will make, a reassuring pointer is comforting.

That is all the more important in the current environment where getting banks to offer mortgages on workable conditions is as challenging as it has ever been in living memory.

However, there is no easy way of determining the value of one broker over another – outside of personal experience. And that is very much in the eyes of the beholder.

In any case, I am not licensed by the Central Bank to give specific advice on one product over another, or one advisor over another, and the bank might well take a dim view of my trying to do so. It imposes standards on all mortgage advisers and supervises them within the current regulatory framework.

As a guide, you should ideally ensure that your mortgage adviser is independent – ie, not tied to a specific financial lender. The more products they can offer you from a range of providers, the more likely you will find the mortgage best suited to your circumstances.

Having said that, in securing my own mortgage, I was advised by a bank’s in-house mortgage adviser and have been very happy with how it worked out. I recount that solely to illustrate that satisfaction in this area is very much an individual matter.

Possibly more important, you need to feel comfortable with your adviser. A mortgage is a major decision and you do not want to feel your adviser is talking down to you, is not readily available to answer your queries as they arise, is not explaining clearly what your options and obligations are or will be, or is generally treating you like a business opportunity rather than building a personal relationship.

You could do worse than consult among friends to see if any had particularly good or bad experiences in their mortgage dealings. There is still little more effective method of business growth than word of mouth, especially in Ireland, and a good adviser will have a track record of happy clients.

This column is a reader service and is not intended to replace professional advice. Please send your questions to QA, c/o Dominic Coyle, The Irish Times, 24-28 Tara Street, Dublin 2, or to dcoyle@irishtimes.com. No personal correspondence will be entered into.