Home' Trinidad and Tobago Guardian : March 15th 2015 Contents MARCH 15 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
Recently divorced, Beverly,
32, has two young boys:
Adam, 5, and Aiden,1.
She is living with rela-
tives but not under
happy conditions. She is
desperate to find some-
where else to live but
knows the pitfalls of renting and really wants
to move into her own home. An aunt,
Annemarie, has offered to sell Beverly a small
two-bedroom house and is willing to hold off
putting the property on the market for two
years whilst she gets her finances organised.
The house is currently being rented "month
to month" at $2,500.
Beverly is unable to qualify for adequate
mortgage financing because her debt service
ratio (DSR) is still too high at 12 per cent of
her salary. She has an unsecured loan of
$50,000, which will be repaid in three years
time and, only then, can she approach a lender
to finance the property.
By that time, she would be older and---
assuming interest rates and her salary remain
the same---it would mean less money from
the mortgage company. It would also mean a
more expensive house and Aunt Annemarie
might not wait that long.
Beverly is hoping to collect a back pay of
about $95,000 after tax but it could take more
than 12 months to come in. She is not certain
what her financial position would be in two
years and if she can really afford to purchase
this or any house.
Beverly wants to know her options and is
deliberating if to pay off the loan or make a
downpayment when she gets the back pay.
Nick's Assessment & Advice
Beverly is in an uncomfortable situation but
at least she is not paying rent. However things
cannot continue indefinitely as they are and
she might reach a breaking point where the
money saved in rent would be worth less than
the peace of mind foregone.
Beverly could ask Aunt Annemarie to allow
her to rent and see how the chips fall in two
years, but knowing her aversion to rent, she
might not want to consider it especially with
an uncertain financial future and two young
Apart from the current living arrangement,
Beverly has a few other challenges. Firstly, she
cannot afford a decent mortgage because of
her existing debt. Secondly, she does not have
the prescribed downpayment. Thirdly, with
the passage of time, she gets older and her
ability to borrow decreases.
With many of these cases, we seldom receive
all of the information to do a meaningful analy-
sis. As such, some reasonable assumptions
must be made to aid in the decision process.
Some of the missing data include:
• How much is Beverly s salary? If we don t
know this, we cannot estimate the quantum
of the mortgage she can qualify for.
• What are her monthly loan payments?
Without this information, we cannot estimate
what her loan balance would be in two years
• When does the aunt s offer expires?
• What is the value or offer-price for the
Filing in the gaps
Beverly needs to know her projected financial
position in 24 months in order to evaluate if
it makes any sense pursuing this or any other
Starting with the current loan, if we know
the interest rate we could figure out the month-
ly payment and using her DSR of 12 per cent
we could gauge her salary.
Interest rates for unsecured loans could
average around 13 per cent APR (annual per-
centage rate) and with a balance of $50,000
and 3 years remaining, her payments could
be about $1,680 per month placing her salary
in the vicinity of $14,000 ($1,680 / 12%).
Based on these variables, we can then project
her loan balance in two years to just under
$19,000 (See table above).
In the table the monthly interest is 1/12 of
her annual rate so in the first month her
monthly interest would be $542 ($50,000 x
13% = $6,500 /12 = $542). The difference of
$1,138 ($1,680 - $542) goes towards reducing
During the course of two years, she should
have received the back pay of $95,000. Assum-
ing she clears the loan balance of $19,000 she
will be left with $76,000 ($95K-$19K) to go
towards a down payment and closing costs
(legal and other costs).
In two years, Beverly would be age 34 and
with a salary of $14,000, a mortgage payment
of $4,900 (35 per cent of gross income of
$14,000), an interest rate of six per cent and
a term of 26 years (age 60 maturity) she could
borrow up to $773,000. If this represents 90
per cent of the house price, then she would
be in the market for a property costing
$859,000 ($773K / 90%).
Financing the shortfall
Beverly now has some other questions to
• How much money would she need to
complete the purchase?
• How much money can she amass by that
• What price could she negotiate for the
Assuming closing costs are five per cent,
Beverly would need up to 15 per cent (inclusive
of down payment) to complete the purchase.
If the house costs $859,000 then she would
need $128,850 ($859K x 15%) minus the
$76,000 from her back pay ($128,850 -
$76,000 = $52,850 shortfall). To fill this shortfall
in two years, she would need to save about
$2,200 per month.
Knowing that she may have to pay a mort-
gage of up to $4,900 she should get used to
living without this money, which is $3,220
greater than what she is currently paying in
debt ($1,680 + $3,220 = $4,900). At this rate
it would take her 16 months to accumulate
Working backwards, Beverly now knows
that she can afford to purchase an $859,000
property so it gives her a limit when negotiating
with Aunt Annemarie.
If current annual rents average around five
per cent of property values, a reasonable gauge
for the price of the house could be $600,000
($2,500 x 12 = $30,000/5% = $600,000). This
gives Beverly more than enough wiggle room
in case the property costs more than $600,000.
If the price is $600,000 then the cash she
has to accumulate will be $90,000 ($600,000
x 15%). Factoring the back pay again, the short-
fall now becomes $14,000 ($90,000-$76,000).
renting to own option
The challenge is that Beverly has no money
right now and desperately needs to move. She
hates to rent but, if it means peace of mind
and living in the house, she will eventually
own then she could consider offering a "rent
to own" arrangement with her aunt.
Annemarie currently collects $2,500 per
month. Beverly could offer to pay the rent
plus some extra towards the purchase price
of the property. Factoring a rent of $2,500
plus her loan payment of $1,680, she can pay
an extra $720 ($2,500 + $1,680 + $720 =
$4,900) towards the purchase price. In 24
months, she would have contributed the sum
of $17,280 ($720 x 24).
CAUTION: Outside of this simple example
" rent to own" agreements should not be taken
lightly as there may be many pitfalls to consider.
To get a list of these pitfalls e-mail me at the
(Details of this case were modified to protect
client s identity)
If you have any questions or need advice
on today's subject please e-mail me at: nick-
firstname.lastname@example.org or web at: www.Finan-
A rent-to-own option...
Beverly has a few other
challenges. Firstly, she
cannot afford a decent
mortgage because of her
existing debt. Secondly,
she does not have the
Thirdly, with the passage
of time, she gets older
and her ability to borrow
Links Archive March 14th 2015 March 16th 2015 Navigation Previous Page Next Page