A loan reinvestment scheme

Geoff and Valerie are having a hard time living on NZ Super because they don’t have any savings apart from the equity in their mortgage-free home (worth $250,000). A friend tells them about a loan/reinvestment scheme that could solve their problems.

The deal is, Geoff and Valerie raise a loan on their home of $150,000 at 8.5% p.a. After paying all the fees, the remainder of the loan is then lent to a finance company at 13.5%. The higher interest rate will pay the mortgage interest, with some left over to pay for living expenses.

However, Geoff and Valerie also discover that the expenses are quite high – about $15,000 in all (10% of the amount that they borrow). Even so, there would still be some extra income – about $80 a week after tax. Geoff and Valerie decide that they should talk about the deal with their lawyer. Borrowing so much at their time of life looks a bit scary. The high interest rate from the finance company may also reflect a high level of risk.