Father Sez

This journey, leading to the signing of the S & P last Friday, started shortly after my wife and I studied the first ever family budget that we had done. Not good! 

Then we did a review of the family loans and applied the DTI ratio that I read about in Moolanomy. (The Digerati Life has also written about this. Both are very useful pieces of information for would-be borrowers and others like me, who may never have run a health check on our loans.)  The results of the loan review were, needless to say, not good, and this was the final straw that led to my wife and me deciding to put up the house for sale.  

(We bought this house quite sometime ago. About ten years ago, we shifted and this house has been rented out since then.) 

I have read that some bloggers, like Brooke would prefer to handle the sale themselves. We appointed an agent and are very happy with her efforts. Still, I must mention that there was hardly any interest, until I followed FMF’s sound advice on not making the single biggest mistake of home sellers.   

I have now signed the S & P agreement, and the buyer has paid the 10% deposit. There are still a few formalities to be settled before the property actually changes hands, and we receive the rest of the money.  

My wife and I have agreed that the proceeds, after paying the costs of the sale will be used primarily for debt reduction. Our loan profile “before” and “after” our planned debt settlement will be as shown below.  

Some amounts are being set aside now for family expenses expected to arise over the next couple of years. (This was at the reminder of my wife and I think it is lucky that I did not overlook this.) 

At the time of the loan review, we figured our “after sale” DTI (Back ratio) to be 7.40%. The present estimates (after debt reduction and amounts set aside) are at 11.80%, still a fairly respectable rate, I think.  

The sale also marks another milestone of my plan to quit the rat race.  

Selling the house was not that simple a decision to make, despite the fact that we had not been living there for almost 10 years. The house is in the capital city (we now live in a slightly more rural setting, about 60 km away from the capital), and there were thoughts about shifting back to the capital someday.  

Even after making the decision to sell, signing the S & P was another toughie. There are emotional ties to the house.

I’ll write more about this tomorrow.  

Though I keep track of my loan balances in my year end net worth computations, I have never really sliced and diced them to look at them from different perspectives.

Today I did just that.

The breakdown of my loans (by percentages) is as follows:

This is not good. The number of months left assumes that I’ll have the same earning power over the next 6 years or so may not be realistic. Though I have a couple of irons in the fire, they are still a little long shots at the moment.

More confirmation that my debt levels are not good is shown when I apply Moolanomy’s DTI ratio calculation.

The present payment is a whopping 39% of gross income.

My wife and I have decided to put up on our houses for sale. The rental returns we are getting is far inferior to the savings that we’ll make if the sales proceeds were to be applied to loan settlement. (We are lucky to have a truly wonderful and responsible family as tenants, so at least there have been zero headaches. My wife and I are also probably rated by them as great landlords as we have maintained the same rent for the past 6 years.)

If the property were to be sold and the net proceeds used to repay loans, our loan profile will change as follows :

The DTI now becomes a much more manageable 7.40%.

This will lessen the financial pressure for me as I yearn for a much better life / work balance.

We put up the house for sale about a couple of months ago. Perhaps we are making what “FMF calls the No: 1 reason why houses are not being sold” mistake.

My wife tells me that her instinct is that we would not sell the house and something else would happen that would change our financial plans for the better.

I don’t know. This is something that I also have to discuss with my two elder girls. The house has many good memories. This was our first home, all the houses before were rented. (The 3 younger kids were also born here).

What do you think? Am I doing the right thing? Your advice and views will be most appreciated.

Simple, being a loan guarantor! 

A guarantee ties the guarantor with all the obligations the borrower has in respect of the loan the borrower has taken, but none of the “benefits”. 

Or in other words, a guarantor is a borrower who never got the money. 

Banks in their well funded quest to make sure that no loan given out is left uncollected, very often insist on another party, (other than the borrower) to guarantee the loan. Hence if the borrower defaults, the guarantor pays. 

The main rule is “Never sign a guarantee”. 

The Malaysian Insolvency Department seems to agree. In fact, this is what they are openly announcing. 

Can we live with this rule?  

Banks, at least many in my country anyway, insist on a guarantor, even if the borrower meets all requirements. They just want to play safe. And the loan documents would say (in fine print, of course) that it is up to the Bank to choose who they want to go after, in the event of default. 

Organisations which give study loans, also insist on guarantors. In fact, they usually ask for two, and disqualify the parents. 

My wife has had a bad experience. A “friend” got her to sign a study loan guarantee, during my wife’s younger and much more ignorant days. (Now she’s young but not so ignorant.) The lender made a claim on my wife, claiming they could not find this dead beat borrower.  

The trouble my wife went through to track this bum of a “friend” down and get herself out of this jam has taught her a good lesson. 

But there are plenty of others out there, either nursing bad financial wounds or ending up as financial ICU cases themselves because of guarantees they had signed. 

Can we always say no? I don’t think so.  

We think, evaluate and weigh carefully many choices that we make in our lives. Just like that we have to weigh carefully the signing of guarantees. 

These are the rules we have set in our family. 

1^st – Follow the Main rule for all except family  

2^nd – For family, what is the purpose of the loan? 

3^rd – Has the borrower demonstrated, what we feel is adequate pf knowledge and discipline for us to believe that we will not be “called on” to pay the guarantee. 

4^th – What is the downside? Can we live with it should the worse case scenario play out? 

My history on guarantees so far are :- 

a) I gave an indemnity on a scholarship secured by my nephew, who did medical studies in a local university. He had to pay a certain sum, should he not serve the Government for a certain number of years after graduating. He is nearing the end of his “bond”.  

b) I signed as a guarantor for my cousin who took a housing loan. This was well before the setting up of all the above rules. I am happy to say that he has paid back the loan and bought another 3 units since then. 

Both the above turned out well.  

On the receiving side, two of my wife’s uncles have signed a guarantee for my second girl’s study loan. I strongly suspect that they did not evaluate this issue as carefully as I might have. Or perhaps they do have high regards for my family’s fiscal discipline.

I am indeed most grateful to them, as without meeting this condition, my daughter would not have obtained the loan.  

I don’t often receive requests to be a guarantor. If I do, I just smile and say that my employer has rules that prevent me from taking on financial obligations without their approval.  

This has so far worked for me. 

The CNNMoney story of 9^th September started like this.

“It seems surprising that Kurt and Vicki Oliver could lose their home to a bank foreclosure. They had great credit, long-term employment and excellent assets and income.”

This story is another one of the sad stories emanating from the subprime mess. However the Olivers do not appear to have been one of those borrowers who borrowed far more than they could ever afford, and took illogical risks.

As the CNNMoney opener states, the Olivers appear to be pretty stable and switched on people.  

Rather, these people seem to be one of those, who just did not read and understand the fine print of the agreements they were entering into. They entered into agreements, having no idea of the liabilities they were taking on. Now, sadly, they are paying the price. 

Sometimes, we see people at supermarkets, squeezing a loaf of bread, sniffing it and checking it from tip to toe, before buying it.  

Similarly, in fact, even more so, reading and understanding the documentation governing the financial obligation that we are taking on should be a must. But the financial dumps are littered with people who took this brokers word, that lawyer’s word, that lender’s word and regretted that day. 

A former boss of mine told me, “if anyone ever presents a deal to me, a deal that needed me make an immediate decision, my answer would always be NO. 

This makes a lot of sense. The same should apply for any documentation that we are asked to sign. We should ask for and get time to read and understand them, and if necessary get an independent trusted lawyer to vet them for us.

If we are asked to sign on the spot and no time is given for us to study the documents, we should just walk away. That’s it. Period. 

No financial institution or intermediary is there for purposes of charity. Their purpose, maybe, their sole purpose, is to make as much as they possibly can from us. Their lawyers (though, usually paid by us), use their full arsenal to protect the banks, and guess who, is left unprotected and exposed. 

I should know. 

I read an ad for a fixed rate loan that offered me substantial savings should I refinance my mortgage. I applied, went through the process and finally got a letter of offer.  

The legal documentation that followed was something else. The agreement provided for the lender to increase rates anytime they wanted, decrease the term anytime they wanted, transfer the loan to someone else at their wish and my cost…..blah, blah, blah. 

Had I just signed the documents, which was what the lawyer wanted, I would have gotten myself an open ended obligation that appeared to have no limits.  

Whilst it is important to manage our debts well, it is even more important that we take on only well understood and accepted debts in the first place.