NZ Herald 16 February 2013

AYikes! The first thing I did on receiving your letter was Google the company name — which I’ve changed to XYZ for two reasons. They might try to sue me. And in any case, my comments would apply to any company offering such high returns.

Included in the options that came up when I Googled — before I had even finished typing the company name — was “XYZ scam”. And there were lots of websites under that heading.

That doesn’t prove anything, of course. It’s always possible competitors or jealous people are besmirching the company. But it would be enough to send me running in the opposite direction.

A basic rule about investing: If a company seems at all iffy, give it a miss. There are many other rock solid investments.

“Well yes,” some people might say, “but not ones that double your money in three months.”

If returns like that are not a warning sign, I don’t know what is.

It’s possible that the early investors’ money will double over a short period. That might be why this couple’s friend is roping them in, because he or she has received fabulous returns. But I mean “fabulous” in the old sense — “told about in fables or imaginary”.

Promoters of scams often recruit local people with credibility, and deliver extreme returns to them. It’s part of the set-up costs. The recruited people then rush to share their good fortune with others. It must be horrible when they see their friends and family lose heaps — and even more horrible for the losers.

Another basic rule about investing: The only way a genuine investment can double in three months is if it’s extremely risky, and there’s a huge chance you will lose most or all of your money.

Doubling in ten years is reasonable for, say, a diversified share or property investment. To get that, you need a return of about 7 per cent a year. But doubling in three months or even a year or two is silly stuff.

As for the Christian connection, there have been some bad things done over the centuries by people who used that label.

If the promoters of XYZ really are Christians, and they really can double money in three months, why don’t they just invest their own and borrowed money until they have a vast amount to give to starving children around the world?

Three further points:

• Other words you could Google with the company name are “fraud”, “warning” or “review”.
• After Googling the company, I went to the scam alert list on the Financial Markets Authority’s website, which you can find at tinyurl.com/fmascamlist. XYZ is not listed there, but that might mean only that the company is new to New Zealand and the FMA hasn’t heard about it yet.

  With that in mind, I told the FMA about the company, and they are looking into it. You can do the same if you smell a rat about any investment, through the Contact Us page on www.fma.govt.nz. You don’t have to fill out your contact details. And if you do, the FMA will not give your details to anyone else without your permission.

• In case other readers are wondering, I answered this correspondent straight away suggesting her friends stay away from XYZ. Waiting for the weekend column might have been too late!

AYour worry is reasonable. Nobody knows who will end up in rest home care or similar and for how long. And it’s better if your Mum can pay her own way and make her own choices.

However, she’s not expected to spend every last cent on care. At a certain point, the government steps in with the residential care subsidy. It works like this:

• If your mother lives on her own (or has a partner who is already in residential care) and she goes into a rest home, she’s expected to pay for the care until her total assets decrease to $213,297. After that she will qualify for the subsidy.
• If she lives with a partner and one of them goes into care, the couple is expected to pay for the care until their assets decrease to $116,806 not including their house and car. (An alternative cutoff is $213,297 including the house and car, but that will apply only to people who don’t own a house — or own a very cheap one.)

There’s also an income assessment that may affect the amount of your subsidy. For more on all of this, see tinyurl.com/residentialsubsidy.

How does a reverse mortgage fit into this?

When the Ministry of Social Development is measuring your mother’s total assets, it will look at the net value of the home minus the mortgage — including all accumulated interest.

If she is on her own and needs to go into residential care, it’s likely that she would use up her own savings and then sell her home to pay for care. If she had a reverse mortgage, that would be paid off when the home is sold — speeding up the time at which she would start to receive the subsidy.

If your mother has a partner and either of them is still at home when the other one goes into care, the fact that the couple’s house has a mortgage wouldn’t affect whether they got the subsidy.

It seems, then, that it doesn’t make sense for your mother to avoid getting a reverse mortgage because of concerns about paying for long-term residential care.

The Ministry of Social Development does warn that it “may look into what the reverse mortgage was used for.” The ministry has “discretion to decline subsidies where an applicant has deprived themselves of income or property.

“That means the money from the reverse mortgage needs to be spent on your Mum or for her benefit. So if your Mum uses the reverse mortgage to spend on or give money to her family, that money may be added back into the asset test,” says a Ministry spokesperson.

I think that’s good policy. I’ve heard of a woman skiting that her family was worth millions but the government was paying for her rest home care because of the clever use of trusts.

But that’s not what we’re talking about here. If your mother gets a reverse mortgage for her own reasonable spending, I can’t see that causing any problems later.

AThe government certainly couldn’t stop you doing this. It’s a free country. But you’re right to question whether it could affect future government assistance.

Firstly, see the above Q&A about what your parents used the money for — although in your case it seems clear it was for their own benefit, rather than yours.

Beyond that, says the Ministry of Social Development, “It really depends on the value of the home, and the amount of the loan now owing on it. The amount of the reverse mortgage is unlikely to be as much as the market value of the house. Therefore, if the children paid the value of the reverse mortgage and the house was signed over to them, we would treat the difference between the market value of the house and the reverse mortgage as deprivation of an asset.”

In other words, if you four “children” pay back a $300,000 loan and take ownership of a $400,000 house, your parents have given you — or deprived themselves of — $100,000.

The Ministry continues, “If the parents decided to apply for a residential care subsidy (RCS) at a later date, the Ministry would most likely include the amount of this asset (the difference between the market value and reverse mortgage) in the Financial Means Assessment.”

My interpretation: This is because some parents could deliberately make gifts to their children so they can get more out of the government.

“Moreover,” says the Ministry, “as they do not own the house they would have to meet the asset level which is currently set at $213,297. They would not have the option of meeting the lesser threshold of $116,806 and excluding the house and car from the assessment.”

Another issue, for both you and the previous correspondent, is the possible use of an interest-free residential care loan to help pay for care. In your case, your parents wouldn’t be able to get such a loan because they would no longer own the house.

But this is all getting too complicated! See tinyurl.com/residentialsubsidy, which explains things clearly. You can download a brochure, or ring a number where you can talk through your situation.

Where does this leave you? Perhaps with you and your sisters repaying the loan but not taking ownership of the house — on the assumption or agreement that you will inherit the house later.