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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Mental Capacity Act

Imagine this – You have a sum of money in a bank but the bank refuse to let you withdraw it because the staff felt you do not have the mental capacity to manage it. If you think this sounds ridiculous, you many want to know this is a real case which happen a decade ago.

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(The link to the full story had broken but you can read the full legal suit between Mdm. Hwang vs OCBC via here. )

While most of us do not have that $8.8 million in banks now, we can neither assume we will not have it in future nor we will not suffer from dementia.  With more and more elderly in Singapore and such incidents will become more common, the Mental Capacity Act was enacted in 2008.  This Act allows a person to appoint someone to act on his behalf when he does not have the capacity to make a decision for himself due to mental incapacity. The Parliament amended the Mental Capacity Act in 2016 to allow paid professionals to make key decisions for those who can no longer decide for themselves as there are more elderly without any family members or there may not be any suitable family member who are suitable to handle the elderly’s affairs.

The common concerns when I shared with people on the Mental Capacity Act or more commonly known as Lasting Power Attorney is they are worried the appointed person abuse his authority or takes over his assets etc.  If you wish to know more about the topic of safeguarding your assets and distributing it to the right people in the right way, you may want to attend this session organised by my company.

Here’s a little video on dementia  but Mental Capacity Act is not just about dementia.

If you are interested, just submit the form below and I will help you to register for the session.

WhatsApp Image 2018-04-19 at 17.48.46

 

Changes to Integrated Shield Plans(ISPs)

It is likely that you are reading this because you are concern or confused with the changes to the private integrated shield plans today(07/03/2018). In case you are here by accident and still unaware of the changes, you can read the  following for more information.

5% co-payment for new Integrated Shield Plan riders to help address over-consumption of medical services

Before discussing about the changes, let us first understand the need for it.

The following is a premium table for insured age 1 to 75 of an ISPs from one of the service providers in 2008 and in 2018. These premiums can be partially paid from the CPF Medisave Account up to the withdrawal limit base on the insured’s age.

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In order to cover both the deductible and co-insurance, the insured need to purchase the rider as below. It also shows the increase from 2008 to 2018.

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The premiums for the main plan had increased 20 to 30% and the riders increased almost 200% to 300%. While different insurers may had adjusted their rates differently, the fact is all had sky rocketed over the last few years. Thus a change is needed and the question is  “what” and “when” .

Before going to the details, let’s see if you are affected. The application date of your policy determines the impact of the new changes to your private integrated shield plans. The chart below shows the impact of the application dates on your ISPs.

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Do note there is no changes to your policy if it was applied before 7th March 2018. However, we cannot rule out the possibility the insurers of making any changes to the plans.

What are the changes?

The patient must bear the lower of 5%  or an annual cap of S$3,000 co-payment for new Integrated Shield Plan riders.

To manage cost, insurance companies will also also have their approved panel of doctors. The annual cap of S$3,000 applies if  the insured is treated by the doctors in the approved panel or had received prior approval from the insurer on the treatment. This works similarly to some of your employee benefits where the insurer requires your medical consultation to be with a particular GP.

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Example of the new IP Claim 

Example 1

 

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If there is no rider purchased, the patient/insured will have to bear the full amount of $13,150 assuming the balance is claimable by his IP.

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Example 2Capture

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We can see from the two examples that the new IP has not much impact on small bills. The bill size needs to be at least $60,000 in order to have any difference between a preferred and non-preferred or pre-authorised and not pre-authorised treatment.

Conclusion

There are a few options that we can do to reduce or remove the 5% gap. There is no right or best way to do it and it depends on individual’s objective as well as budget. If you had purchased your IP before 7th March 2018, good for you. If you had not, please do so ASAP instead of KIV for any changes from insurer.

My colleagues and myself are conducting sessions for groups who need any clarification on the changes or to know how it affects you. All you need is to have a minimum group of 5 and we will arrange for a session for your group or staff.

 

 

 

Mortgage Insurance (Home Protection Scheme)

The properties in Singapore are purchase with two types of ownership if there are more than one owner . The property will be either under joint tenancy or tenancy-in-common.

JTIn a joint tenancy, the owners have equal share of the property. The ownership of the property will be automatically passed on to the surviving co-owners regardless if a Will was made. Most HDB properties are under this arrangement.

Another type of ownership i.e.  Tenancy-in-common allows each owner to have a different share of the property and to leave his share of the property to any beneficiary upon his death. The beneficiary may receive his share in equal or different percentage. This type of ownership usually occurs in private properties and in certain situation, it can be for HDB flats, depending on the scheme that the flat is purchased.

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In the above example, the Husband can Will his share of 35% to the wife, son and daughter at 20%, 10% and 5% respectively.  Therefore, the total share among them will be wife (45%), Son ( 20%) and daughter (35%). This distribution can cause an issue such as the wife even though holds the majority of the share at 45% but the total holdings of the children is 55%. If they children decides to sell this property, the wife can only agree to it.

We will discuss about the distribution issues in future and for now, there is a bigger problem with property ownership with outstanding loan. In the above situation, regardless of Joint Tenancy and Tenancy-in-common, if a mortgage insurance (or more commonly known as Home Protection Scheme for HDB) is not in place to cover the husband’s share, the beneficiaries will continue with the loan. If this property has an outstanding loan of $1mil, this amount will be re-structure with the surviving owner’s financial ability to loan base on their Total Debt Servicing Ratio(TDSR) . What this means is there can be a possibilty that the bank will not approve the same $1mil outstanding loan to the new owners due to a lower TDSR because of lower income. The owners will have to pay up $200,000 if the approved loan is at only $800,000. In the worse case scenario, the new owners may have to force-sale the property instead of inheriting it.

The most cost effective way to cover the outstanding loan is to have a mortgage insurance. Typically, an owner can have an individual policy to cover or a joint-life mortgage insurance to cover the first death of the owners.

Assuming a couple took an individual policy to cover their $1mil outstanding loan, the mortgage may look like this.

husband

wife

The total premiums will be $5555.55

In the event if the husband passes on, the $1mil will be paid out to the family so that they can offset the loan. The surviving owner can choose to terminate or continue with her own policy. If both pass on (e.g in a traffic accident), a total of $2mil will be paid.

Alternative, some will choose to use a joint-life mortgage insurance and the couple will buy a $1mil policy to cover the first death of the owner. Will this be cheaper or more expensive?

Here’s an example

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In the event if the husband passes on, the $1mil will be paid out to the family so that they can offset the loan and the policy will be terminated. The premium is $5616.60

Which is a better option depends on individual’s situation. It is uncommon the total premium of 2 individual policies cost more than a joint-life policy. Do talk to your financial adviser to have a proper assessment of your risk. Our intention of purchasing a property is always to pass down an asset, do not leave behind unsettled debt.

Do you need a million dollar of coverage?

There was a period of time when a million dollar was a unreachable figure. I’m not saying that it is an amount that is easy to accumulate today but it is more realistic. Afterall, an average HDB flat can cost close to half a million and some flats were sold above the $1mil mark in some area.

So, do you need a million dollar cover and how much do one really need as a coverage amount? Here are some methods you can use to estimate your coverage required.

1) Multipliers of  Income Approach

download (1)This is a very traditional method of calculation is taking your annual income multiply it by 5 or 10.  That is to assume if premature death occurred now, your love ones will have 5 to 10 years of your income replacement to let them adjust to the lifestyle prior to the death. This method is the easiest but it has it flaws because in practical sense, the dependents may never have the same earning power as the sole breadwinner. For e.g. I have a client who is in management and earns nearly $20,000 per month. His wife have not been working since the birth of the first child more than 10 years ago. Will it be easy or possible for the housewife to get back to employment and earn $20,000 in the next 5-10 years? It can be tricky to decide how long the family will adjust to the lifestyle without the sole breadwinner’s income.

 

2) Need-based Approach

CaptureAn more commonsensical method is the need-based approach. It can be very comprehensive but because of the comprehensiveness, it can be a complicated process. This method takes into account the financial obligation an individual have for each dependent and the assumed inflation rate till that dependent becomes financially dependent. The individual’s assets will be categorised into cash, near-cash assets such as shares and unit trust which can be converted to cash within days assuming market valuations are not an issue. However, assets such as properties will take months to be convert into cash. The properties can be further categorised into stay-in or investment property. For e.g. if an individual own only a property which the family is staying currently, it is unlikely the dependents will sell it else they will lose the roof over their heads. But if the dependent have another property, the dependent can consider selling it to have more cash on hand if needed.

As mentioned, this method is very commonsensical and we can see it using this simple case study.

An individual has a wife, a son age 5 and a daughter age 4. The wife is financially independent on him and he provides $500/mth to each child. He wants to provide the children till they are age 21. We can use the following to calculate the amount of coverage he need.

(Age of child’s financial independence  – current age of child) x $500 x 12

For the son, it will be 

(21 – 5) x $500 x 12 =$96,000

For the daughter, it will be

(21 – 4) x $500 x 12 = $102,000

The total amount of coverage required for him will be $198,000. 

Do note in an actual planning, a financial advisor will take into consider that inflation rate to ensure the $500/mth is in line with the cost of living.

3) Income Protection Approach

 c95b3987f397973cd66558ff419555dc--make-money-today-make-more-money (1)One of the easiest is to look at the potential income a person can earn till his retirement. The retirement age can be 50,55,60,65 or even beyond that. This method is similar to how workman compensation or a court decide on a disability or death compensation.  The disadvantage is it is difficult to assume the increment rate. The amount can be derived using the following

(Retirement age – Current Age) x Current Income

However, in a real life, a person’s income will increase over the years because of his experience or promotion and we have to take into account the salary increment over the years. The amount after taking into account the increment can be compute using a financial calculator

PMT= Annual income

Ir= Assumed increment annually 

np = No. of  working years (i.e. Retirement age –  Current age)

Click “FV”. The figure shown on FV is the potential income one stands to earn.

Assuming the retirement age is 55, a person with the below income at different age will generate $1,000,000 of income assuming there is a 3% increment annually.

income

What the chart above means is if a person is age 25 years and earns a minimum of $21,020 annually, he should protect his loss of income of $1,000,000 that is potentially in the bank if nothing goes wrong.

Please note the 3 methods of calculation are meant to be informative only. For a proper assessment, please speak to a financial adviser.

 

 

 

 

 

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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Coverage for diabetics

AIA Singapore had launched, AIA Diabetes Care, a first-in-market critical illness plan tailored specifically to the needs of patients aged 30 to 65 and diagnosed with Type II diabetics and pre-diabetics  .

It is challenging for diabetics to purchase additional insurance cover as the insurance applications are often rejected, or the insurance cover is often subject to exclusion, or an extra premium is loaded. Instead of the usual long medical questionnaires, AIA Singapore made the process of application easy for the applicants with just 5 simple questions.

AIA Diabetes Care provides coverage for key diabetes-related conditions, ensuring you have the financial support you need in case the unexpected occurs.You have the option to cover against Major and Early/Intermediate Stage Cancer.

The 5 key diabetes-related conditions covered in the policy are

download        Blindness

Heart bypass       Coronary Artery By-pass Surgery

Heart attackHeart Attack of Specified Severity

kidney      Kidney Failure

stroke       Stroke

For more details on AIA Diabetes Care, please contact me via the contact form below.

Enjoy 10% discount off first-year annual premium for applications before 31st May 2017.

 

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.

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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.

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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.

 

 

 

 

 

 

Insurance industry in 2016

2016 was a challenging year for the insurance industry. Other than the economical changes that affected the financial sector, FinTech became more common to consumers and they have more choices when it comes to buying an insurance policy. There were several regulatory changes too. So, how did the insurance industry ended in 2016?

According to reports from Life Insurance Association(LIA), the total new business underwritten rose 10% to SGD3.29bn  in the year 2016 from 2015. Out of this amount, SGD 2.26bn were from annual premium products .

Therewas a minor shift in distribution channel of insurance policies as well.

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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.