Looking at the report that an ex-IFA has been jailed for ten years for defrauding investors out of almost £12m, one aspect of the story caught my eye.
One of his victims is said to have mortgaged their house to invest the lump sum with the fraudster. Even when the end result is not an investment in a fraudulent pyramid scheme, this is really foolish practice.
If the only wealth you have to invest is the equity tied up in your main residence then mortgaging to release it is always a bad idea. In addition to the cost of mortgage interest, which you have to cover before making any investment returns, the risks associated with this course of action are substantial.
The amount you owe to your mortgage lender will remain fixed. The value of your investments can go down as well as up. If the value of your investment is less than the amount you owe on your mortgage, and you are unable to find the cash to make up the difference elsewhere, then the consequence can be losing your home.
Investors fall victim to fraud often due to a combination of factors. A slick and convincing salesman combined with a degree of naivety or even desperation on the part of the investor is a dangerous combination.
Avoiding fraud is a case of sticking to simple investments, only ever taking investment advice from someone who is authorised by the Financial Services Authority and being very sure about where your money is going.
