Patrick Connolly at Chase de Vere addresses a Money Observer reader’s question about whether it is ever worth borrowing money to invest.
I would appreciate your opinion on the way I have organised financial affairs for my wife, aged 83, and myself, aged 88. We have already consulted our solicitor and an independent financial adviser (IFA), who both disagreed with my approach but had no clear alternative to offer.
We recently took out an equity release lifetime loan of £72,000 with a fixed interest rate of 4.28% against our property, which is currently worth £650,000. With this money we each invested the full allowance of £20,000 in an Isa, to add to investments we already had in 25 different funds with an income and growth outlook. These generate a 3.7% return overall. Over the years we have been quite successful by making full use of your excellent Fund Choices* magazine.
Our solicitor has suggested that we consider taking out insurance to cover possible future nursing home care fees, but at our time of life the premiums required would be astronomical. Our IFA thought borrowing to invest a bad idea but could not offer advice on how to generate extra income. In my view, although with interest the sum to be paid back increases dramatically over time, it is reasonable to assume that the value of our house will also increase. In addition, the amount that may be liable for inheritance tax would be reduced when the loan is paid back.
We realise our income from all sources would not be enough to cover nursing home fees, but it would be sufficient to pay for care at home, and we are both determined to stay put as long as possible.
A Clayton, Brighton
Patrick Connolly at Chase de Vere replies: Do you need the extra income now or are you trying to plan ahead and cater for possible care fees in the future? If the latter is the case, I’m not sure why you have taken out equity release now, because it means you’ll be paying interest on the equity release loan to borrow money that you don’t currently need, and that interest will be compounding.
If you do need extra income, either now or in the future, the best approach is to consider your overall circumstances, finances, assets and liabilities before making any decisions. I agree with your IFA to the extent that it is risky to borrow money in order to invest, especially if you are paying a high rate of interest on the money you borrow and if the amount you owe is compounding.
Equity release itself may or may not be a good option for you. Equity release products generally have improved significantly over the years, although depending on how long you live, the debt could eat significantly into any inheritance left to your beneficiaries. Moreover, there is absolutely no guarantee that house prices will continue to rise, and certainly not by the amount of the compounding debt that you will have.
As your property is worth £650,000, another option would have been to downsize to a less expensive property. It is usually a high-risk strategy to borrow to invest. It is also a high-risk strategy to take out equity release without taking independent financial advice. If your current IFA couldn’t suggest a suitable alternative, perhaps you should ask another independent financial adviser to review your overall finances and see if they can help.
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*The 2019 Your Fund Choices supplement will be available in February.