Does a smaller loan on your property makes sense?

The outlook for mortgage rates is that the rates are expected to go up. It is a known fact the mortgage rates have a significant impact on the cost of buying a home. When the rates increase, your monthly payments go up. A 5 basis point change in the rates can be significant in the long run especially the loan size is huge.  Assuming a loan of $1,000,000 at 1.60% increased to 1.65% will see an installment repayment from $3,499 to $3,524 over 30 years. Thus, consumers are always concern about the rates. While mortgage rates is beyond our control, we can decide on another major factor that affects the repayment installment i.e. the amount of loan to commit. A common decision to be made by property buyers is should they pay more upfront and take a smaller loan or should they pay less upfront and hold more cash for liquidity. But there is no right or wrong answers to that decision. On top of the investment opportunity to generate a better returns than the mortgage rates, it also depends on a person’s mindset to be debt free.

Let me share one of my client’s situation and you decide what you will do. We shall call him Mr. Million.

Mr. Million had purchased a property and took a 30 years mortgage loan of $1,000,000 at 1.6% p.a. The monthly repayment as well as the total repayment amount is as follow.

1 mil 30 yrs

The monthly installment is $3,499. The total interest paid will be $259,781.

Mr. Million have a spare cash of $150,000 and he was unable to decide to reduce the loan to $850,000 or just hold that cash and re-invest it.

Option 1: If he choose to reduce it by $150,000.

850-30

Advantage:

  1. He reduces the monthly installment to $2,995
  2. The total repayment is reduce to $228,233

Con:

  1. He lose the liquidity of $150,000 for liquidity
  2. The $150,000 can serve as a backup fund for his monthly installment of $3,499 if needed.

 

Option 2: If he choose to take a $1,000,000 loan and set aside the $150,000 with (i) guaranteed 1.7% p.a. over 3 years or (ii) a guaranteed 2.08% p.a. over 5 years.

1 mil 3 yrs

(i) After repaying $3,499 monthly for 3 years, the remaining loan amount will be $920,175.

The $150,000 would have grown to $157, 875 after 3 years. He can do a capital reduction or re-financing when the lock-in period cease. With that, the new loan amount will be $762,300.

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This will reduce the monthly installment to $2,899 and a total repayment interest of $176,976.

(ii) Alternatively, he can hold this $150,000 over 5 years at a rate of 2.08% p.a.

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After repaying $3,499 monthly for 5 years, the remaining loan amount will be $864,790.

The $150,000 would have grown to $162,900 after 5 years. He can do a capital reduction or re-financing when the lock-in period cease. With that, the new loan amount will be $701,890.

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This will reduce the monthly installment to $2,840 and a total repayment interest of $150,173.

So, what does all these means? Below is a summary:

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In conclusion, while we were taught to  take up a lowest possible loan to reduce our liabilities, it is always good to look at the opportunity cost. There is no best option. It depends on a person’s preference to have the lowest liability, pay the least interest or pay the least cash outlay.

Do note the above scenario is assuming the interest rate remains at 1.6% through out the repayment period. The results may change accordingly to the various factors and you might want to do a proper assessment first before deciding the best course of action.

 

 

 

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Personal Accident Plans

I did a search on e-scooter accidents and it shows there are at least 4 such accidents in April alone.

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May you be a e-scooter rider or a pedestrian, both will suffer physical and financial pain should an accident happened. The pedestrian obviously will be injured with bruised or cuts. If the injuries are serious, he may be hospitalised. The injuries may also not be severe enough to be hospitalised and a dressing or casting may be able to treat the patient. In such case, it will be a financial pain on top of the physical pain he is already suffering. Most people will demand compensation from the e-scooter rider but we have seen that it can take sometime to identify the rider i.e. if we ever did. We also cannot assume the rider can afford to pay as the riders are just students or teenagers in some of the cases. The real challenge is the ability and the willingness to pay. What if the rider is an irresponsible person who just refuse to pay a cent?
accidentFrom the point of rider, you can get injured as well. On top of that, the casualty can go after your for the medical bills and other damages. Do you have that ability to handle such a situation of issuing a “blank cheque”?

If some of these thoughts ever go thru’ your mind either as a pedestrian, an e scooter rider or even a cyclist, what have you done to have a peace of mind?

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If you have not do anything excepting thinking and worrying, here is a little solution. You may want to look into a personal accident plan that covers mainly two things.

1) Medical expenses
2) Public Liability

Medical expenses will take care of the medical bills incurred from an accident. It usually covers Traditional Chinese Medicine, Chiropractor fee and Physiotherapy.

If you are a rider or cyclist, Public Liability will come in useful if the casualty wants you to compensate the damages.

Should an Algorithm Tell You Who to Promote?

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I saw this article in LinkedIn & thought what a ridiculous idea. How would that algorithm assess my performance? How would it know what I did n what am I good at? How would it know I put in more or less effort than my colleagues? But did you realised that this algorithm has been in place for years. That algorithm is your superior. They are the algorithm to determine who to promote n how much increments one should get during appraisal.

I interviewed a candidate for the position as a financial consultant. She felt there is no financial security cos it is commission.

I shared with her my views. When you are paid a salary, the company engage you for service with a fee. If they can engage you when they need your service, they can terminate that service as well when they don’t need it. If your salary and job is determined by a third party, what kind of security are we looking at?

A financial consultant averagely have 100 clients. He may lost 10% of these clients for many reasons. Will the financial consultant be retrench? Yes, if he managed to lose all his client. Due to different expectations, a financial consultant may piss off 5-10% of his client but to piss off all the 100 clients… IMHO, that’s an achievement too.

 

Associate Estate Planning Practitioner(AEPP)

Mr. Liu, who is a widowed, decided to make his Will so that he can leave his estates to his love ones according to his wishes. He went to his lawyer to get the Will drafted. He drafted a simple Will that is just to distribute in equal share to his 2 sons. The lawyer was very professional and got the Will drafted. Mr. Liu was very please with himself that everything is in place and is confident that the 2 sons will not squabble over his (not much) wealth when he leave this world. He decided to call his best friend, Mr. Kiang, for coffee and shared what he had done so that his best friend knew he had drafted a Will and hope he can assist his family if needed.

Mr. Liu told his friend,” Bro, I did a Will and everything will be divided in equal share between my 2 sons. It will be a fair and equal share so they will not squabble over unfair treatment.”

Mr. Kiang asked Mr. Liu, ” Do you think it is a fair and equal share that will leave them happy with each other?”

Mr. Liu was surprised with that question. Afterall, what can be more peaceful and fair than an equal share among 2 sons? Mr. Kiang continues,” Bro, your elder son is married  and staying with his wife in their own house and your younger son is single staying with you. By getting 50/50 of your house, what do you think they will do with it?”

Mr. Liu replied,” Most probably my elder son will want to sell it since he has his own house and take 50% of the proceed while my younger son will want to continue staying in it.”

Mr. Kiang asked again,” What will happen?” And there was silence…

The above scenario might be a situation when a person speaks to a legal professional to get a Will drafted and when the estate planning is done with an Associate Estate Planning Practitioner(AEPP) before getting the Will drafted.

An AEPP is not there to influence your Will but to give you a scenario of “What-if”, highlight the possible hiccups if the estate is distributed in a certain manner and most importantly, to provide a solution if your estate distribution face a potential issue (such as the case of Mr. Liu).

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I am glad to be certified as an Associate Estate Planning Practitioner after procrastinating for a few years due to busy schedule. I hope my knowledge and skills gain in this course and the financial planning experience accumulated over the years will help to provide a better service and advice to my clients.

 

 

 

Retirement Planning Seminar Part II

Avallis Financial had successfully conducted Part II of the Retirement Planning Seminar on 1st Nov 2017. The audience had a good session on retirement planning and the options that may be possible such as annuities, investment, properties etc. The advantages and disadvantages of the available options were discussed as well.

 

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Here are some articles on SRS that may be useful for you.

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Retirement Seminar

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The guests had an informative session and some were pleasantly surprised that there were no sales or product being pushed after the session unlike some similar sessions that they had attended.

The slides for the seminar as requested by the guests can be downloaded from the link below.

Retirement Planning Slides

Another session on retirement planning will be held in the last quarter of 2017. This coming session will be more ‘hands-on’ and it involves topics such as calculating your own retirement needs. If you are interested to the seminar, just drop me a sms/whatsapp if you have my number or just send the form below to me. I will keep you in the loop. I hope to see you at the next seminar. Read more of this post

Love, Hate feeling in cheque.

Many people reject a career as a financial adviser because they think it is a difficult sales job. Unlike someone who is selling a dress which a consumer can immediately see how good she looks in it or someone selling a weight reduction pills which a consumer can see the effect in week or months, financial products can be very intangible.

The effect of a financial adviser’s proposal will be felt by the client only in years to come when the client manage to retire comfortably. In some cases, a financial adviser’s proposal may be tested much earlier than he wished…. that’s when a claim arises.

20170804_172735_mh1501838966531(One of the cheques made out to a client.)

As usual, mixed feeling when we deliver cheques to clients. On one hand, I know what I have been doing really help the client. To know the client can have a peace of mind and not to worry about their medical cost as well as loss of income due to sickness is fulfilling. On the other hand, we are sad that clients have suffered.

To all the financial advisers out there, keep up the noble work despite the rejections that you may had faced.

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Comparison of Endowment policies

Endowment policies are commonly known as “Saving plans”. The main objective of getting an endowment policy is to accumulate a sum of money at the end of a period of time. For e.g. to provide a education when the child gets into university or to create a retirement fund at age 55.  While endowment policy is not the only way to achieve those financial goals, it is still a good method for those who are risk averse.

An endowment plan consist of a death benefit but that is usually not the main concern. Most will look into the guaranteed returns or total returns. It can be difficult to compare a plan with another these days due to the different features. For a 15 year saving plan, one company may require the policyholder to pay for the full 15 years while another may require you to pay for as short as 1 year, 3 years or just 10 years in what we called as a “limited-pay endowment policy”.

This is a case study of my client who have the following financial objective.

  1. An endowment plan to mature in 15 years time
  2. Expect about $70,000 in maturity amount.

A typical comparison of endowment plans starts with the plans that are able to achieve the client’s financial goal. In this case, there were a total of 8 plans from various companies.

e1
Table 1

Those highlighted were the “best” in their respective feature. The premiums used above were inclusive of any riders included. I prefer to use this premium instead of the basic premium because it is the actual amount paid and it should be used as a reference to the returns. However, other financial advisors may just use the basic premium and exclude any riders or premium loadings.

It can be difficult to compare since the premium, premium term and returns all varies from one plan from another. So, a more accurate way is to compute the internal rate of returns which are the percentage illustrated on the yield table.

It can be rather confusing for a client to make a decision if they have to consider all 8 plans so the plans are usually presented after filtering out the not so ideal plans as shown below.

e2

Table 2

From the above, the plans will be explained to the clients in detail and together with the comparison table, it will be easier for the client to make an informed decision.

A client with a budget constraint or concern with death benefit may choose plan 3 that has the lowest premium and highest coverage amount although it may not be the best option.

For someone who is extremely low risk taker may decide to take up Plan 1 for the highest guaranteed yield. What this means is in the worst case scenario that the insurer did not pay any bonus for the next 15 years, the principle amount is not only guaranteed but you still get a yield of 0.76% per annum.

If the client is very optimistic of the market or the insurance company, he may decide to look at either Plan 1 or 6 since they have the highest yield base on 3.25% and 4.75% projection respectively.

There is no hard and fast rule to suggest one should choose a particular plan. It all depends on an individual’s personal choice. My role as a Independent Financial Advisor is to provide an objective view so that the client have a clear answer to his financial goals.

 

 

 

 

 

 

IBF Standards

The IBF Standards are a set of competency standards for financial skills. It is a comprehensive quality assurance framework with both an accreditation and a certification system.

There are 3 levels of IBF Certifications as shown below.

certification_process(source:www.ibf.org.sg)

 

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More information on can be shared from this YouTube clip

Policies extend benefits to cover Zika Virus

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The number of cases for Zika Virus in Singapore have increase to more than 300 in less than a month since Patient Zero was identified. The preventive measures advised by NEA is the most effective way to minimise the risk of becoming the next Zika virus patient.

Insurance companies have also taken the initiative to extend the benefits of some plans to cover Zika virus at no extra cost. The following are the policies that cover Zika virus at the moment. I will update the list accordingly.

Personal Accident 

Juvenile Personal Accident 

Travel Insurance

Home Insurance

Maternity Plan

Medical Plans

 

I will update the list when more companies include Zika virus in the benefits. For more information, please contact me by submitting the form below.

By submitting this form, you agree that Avallis Financial may collect, use and disclose your personal data, as provided in this entry form, for the following purposes in accordance with the Personal Data Protection Act 2012 :

(a) to contact you for the purpose of the reply to your queries.