Home' Trinidad and Tobago Guardian : May 11th 2017 Contents MAY 11 • 2017 guardian.co.tt BUSINESS GUARDIAN
FINANCIAL ROAD MAP | BG17
Options for closing the gap
From Page 16
Even though he only owes $3,500 on his
credit card the lender most probably has ca-
tered for a maxed-out limit ($25,000 x 2%
$19,300 = 40% DSR). But even though Aaron
could have debt payments up to $7,720 his
disposable income simply cannot carry it.
His first order of business would be to
eliminate these relatively small debts, which
have a heavy impact on his cash flow.
He can offset some of his shares against
the credit union loan of $33,000 leaving
$30,000 in the share account and releasing
$992 in cash flow.
Whilst he does not want to dip into the
kids' savings he could scale down their
contributions from $300 to $100 and his
from $250 to $50 releasing a further $400
in deductions ($400 + $992 = $1,392). Sim-
ilarly not tampering with the funds in the
education savings account he could tem-
porarily suspend these contributions $700
and $350 respectively releasing $1,050. We
do recommend that he continue to service
his insurance portfolio especially in light of
his current health status.
The other two debts (Credit Card: $3,500
+ Car Insurance: $6,000 = $9,500) could be
cleared using the funds from the money mar-
ket account ($135,000 - $9,500 = $125,500),
which would free up a further $1,070.
The combined cash flows from these ad-
justments would yield $5,012 ($1,500 + $992
+ $400 + $1,050 + $1,070), which could be
used to fund the mortgage.
If we rounded down the monthly mort-
gage payment of $5,000, at 6.5 per cent over
nine years, Aaron could borrow $408,013.
However, with a market price for land of at
least $500,000, he would have to come up with the
difference and cover the five per cent closing costs:
$116,987 (Down payment: $500,000 - $408,013 =
$91,987 + Closing Cost: $500,000 x 5% = $25,000).
If he pulls this from the money market account he
should be left with $8,513 ($125,500 - $116,987).
Once the property purchase is complete and Aar-
on starts making payments he needs to address the
rental income objective. He disclosed that the cost of
constructing a two-bedroom house at today's prices
is $350,000 but if we applied a rate of inflation of say
five per cent per annum the projected cost could esca-
late to $548,000, $198,000 more. It is also $110,600
($548,000 - $437,400) greater than what he is ex-
pecting from his pension lump sum.
Options to cover shortfall:
In the next nine years Aaron could employ any one
or all of the following tactics to close the gap:
1. Scale down cost of project
2. Borrow against the equity of the property then
use an inflation adjusted rental income to repay a
fixed loan installment.
3. If his salary changes then his pension benefits
could increase and by extension the lump sum.
4. If salary increases he could top up savings or
accelerate debt repayment.
5. His insurance policies may have a cash value at
6. The current savings plus interest in the money
market and credit union accounts could offset part
of the costs.
7. Any possible windfalls such as a back pay could
be redirected to savings.
8. Tania might be employed by that time which
would take the pressure off his pension and she could
probably even assist with loan payments and even
leverage her age to recalibrate a smaller loan payment.
Including Tania as a joint owner would also address
some of Aaron's estate planning needs as regards to a
significant asset, potentially avoiding legal and other
costs associated with probating a will or being in-
cluded in letters of administration.
9. The property could be sold at a profit and funds
combined with retirement lump sums to make an out-
right purchase of a ready-to-rent property.
Nicholas Dean (CertFa) is a certified independent
financial adviser and is the managing director of
The Financial Coaching Centre Ltd. If you have any
questions or need advice on today's subject please
email: firstname.lastname@example.org or visit website: www.
Links Archive May 10th 2017 May 12th 2017 Navigation Previous Page Next Page