In an article from New Zealand we learned that an investment firm was advising elderly borrowers to re-mortgage their homes and invest in second-tier finance companies. The firm has denied claims it put money in Beneficial Finance and Five Star Consumer Finance, both now in receivership.
This scam can be used anywhere in the world. Whenever an investment advisor mentions refinancing your home for the purpose of making an investment it should send up a red flag.
Scammers helped people take out interest-only mortgages on their homes and invest the money in Asset Finance, which pays 10.75% interest.
The difference between the interest on the mortgage and the interest from the investments, which is extended by claiming the tax breaks on borrowing to invest, is used to pay the mortgage and provide income.
If the finance companies fail the investor loses everything. The scammer also takes a fee for putting the deal together.
Here is a good way to judge whether or not you should invest at all. Has your banker approached you when you go to the bank? A good banker will notice how much you have on deposit and will offer to sit with you to discuss valid investment options.
Second tier investment scams are risky and costly. The scammer usually says you are fully protected, which is not true. The higher the risk the greater the interest and rate of return, but in some cases the risk is so high there will be no return. Just use caution and get a second opinion.