Home' Trinidad and Tobago Guardian : April 27th 2014 Contents After reading our column
last week Maria---a 40-
year-old marketing pro-
fessional---shared her case
with us. (Details were
modified to protect
client s identity)
Maria recently took VSP (voluntary sepa-
ration package) from her employer of 10 years
and is now awaiting a cheque for $330,000.
Her new job pays $30,000 per month with
the usual benefits. Maria started saving late
in the game but her financial assets after VSP
will be $590,000.
Apart from a money market account, she
invested $150,000 two years ago in the stock
market with funds from a credit union loan,
which is currently double her share account.
She pays loan interest of 1.0 per cent per
month on the reducing balance.
She has not added to her credit union sav-
ings for over two years but has received $7,000
in dividends to date. All dividends collected
both from stocks and credit union shares were
used to subsidise her living expenses. She
invested $50,000 equally across three stocks
and, to date, one has doubled in value, one
unchanged and the other lost $20,000.
Maria wants to know if can she purchase
her own home.
She has narrowed her search down to two
choices: a move-in-ready townhouse for
$1,500,000 or a 3-bedroom apartment for
$1,300,000 that needs some updating. She
loves the townhouse but wants to know if she
can really afford it.
This depends on what combination of debt
and equity (savings) she uses to make the pur-
chase ensuring the mortgage does not exceed
90 per cent of the property value.
First off, we need to know how much money
she can borrow. Assuming that the mortgage
company is comfortable with her current
employment status, the three key variables
that will determine her borrowing power are
income, age and interest rate.
A lender s guide will be to keep her monthly
mortgage payments within 30 per cent of her
gross income (debt service ratio) assuming
that her overall debt obligations does not cross
40 per cent of gross income.
Secondly the duration of the mortgage will
be determined by how much time she has
before retirement (age 60).
Maria s numbers are as follows:
Max Monthly Mortgage Payment: $9,000
Term of Loan:
Assumed Interest Rate:
Maximum Loan Amount: $1,200,000
Assuming a debt/equity combination of 90
per cent / 10 per cent respectively, then the
property value to be considered is around $1.3
This means that she will need to have at
least $130,000 as a downpayment, which
means this mortgage will be $1,170,000. She
will also need to have $82,000 (about 7.0 per
cent of the sum borrowed) for legal fees and
other closing costs.
Total cash needed for this transaction is
approximately $212,000. If she wanted to buy
the $1.5 million townhouse, the most she can
borrow is $1,200,000 which means she has
pay down $300,000 plus $84,000 ($2,000
more) closing costs; totaling $384,000
So which property should she buy?
To improve her debt service ratio (DSR) she
may have to clear off her debt by applying the
credit union shares plus some of the VSP
Further she may need to sell off some of
her stocks to raise cash for the purchase.
You will notice a reduction of her net worth
because of the closing costs that left the system.
Apart from that it is just shifting around of
assets in her portfolio to accommodate the
The only challenge with her final position
after the $1.5 million purchase is a depletion
of her liquid resources. She will now need to
sell off the rest of her stocks to have ready
cash for emergencies.
From a "back of the napkin" calculation,
her stock portfolio, despite the losses, she had
an overall gain of $30,000 or 20 per cent for
the two-year period, the same as a 10 per cent
On the other side of the napkin, the cost
of funds on the credit union loan was 12 per
cent, which is a negative spread of minus 2.0
per cent. However with the dividend on the
credit union shares ($3,500 per year on $75,000
= 5% return) there was a reduction in the
overall cost of funds.
Nicholas Dean (CertFa) is a financial
coach and mentor who is the managing
director of the Financial Coaching Centre
Ltd. He can be contacted:
APRIL 27 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG17
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