wealthmanagement-loans

Wealth Management & Loans

Loans are liabilities which are usually longer term than credit. Loans could be from anything from 6 months to 30 years. Loans such as Personal Loans and Overdraft are usually shorter in tenure. They usually start from a year to about 3 to 5 years. Another short-term loan could be Renovation Loans which has a tenure of 2 to 10 years.

Then we have Leasing Loans which are predominantly for businesses who instead of buying machinery straight with their own cash, they lease it from the lessor. More like renting than purchasing.

Then you have a mortgage loan which usually last for much longer because of the size of the loan. Commercial Real Estate/Property loan is also similar in this instance.

One loan to take not is a Bridging Loan. It is a very short-term loan usually while waiting for funds to come in. Example is when buying a house. The developer may want a buyer to pay up front first. But because a buyer may need to sell a property in order to fund the new purchase, the buyer may take a Bridging Loan first to pay the developer to lock in their purchase and when they sell off the old property, they will then repay the Bridging Loan.

Go to wealth experts and ask a wealth query with regards to Loans.

Let us now share with you some financial ratios that you need to use to help you in your Loans.

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(1) Debt Service Ratio & (2) Non-Mortgage Debt Service ratio:

(1) Debt Service Ratio:
This ratio measures the “Take Home” income, net of CPF contributions (minus employee CPF), used to make regular repayment of debts.

Debt Service Ratio = Total Monthly Loan Repayments
Take Home Income

A good Debt Service Ratio would be 35% below. 45% and above is consider excessive.

Financial Advice:
If a person’s debt service ratio is above the 35% guideline, your advice would be:
1. Considers re-deeming some of his/her loans
2. Watch this part carefully in the event of loss of income due to retrenchment or disability/critical illness.

(2) Non-Mortgage Debt Service Ratio:
This ratio compares the annual payments to service all debts except mortgage with a person’s take home pay.

Non-Mortgage Debt Service Ratio = Total Annual Non-Mortgage Debt Repayments
Annual Take Home Income

A good ratio is 15% or lower. That is because mortgage should take the bulk of the debts. Anything higher would mean over excessive spending in other things.

Financial Advice:
If a person’s NMDS ratio is above 15%, your advice would be:
1. Cut down on over-spending habit
2. Start on a plan to slowly eliminate each debt one by one.