old story of estate planning is now enshrouded in a set
of new rules. We are familiar with budgeting and deferred
gratification, however the environment has changed in essential
Markets are not as predictable as before, there is significant
movement in exchange rates of non-US currency, local food
price inflation is above benchmarks, high bank liquidity
has fuelled more consumer debt, especially in house mortgages
and credit cards are widely available.
The problem with credit card debt is the annual percentage
rate, which hovers around 22 per cent. The average credit
card debt balances have crept upwards by some four per cent,
according to Central Bank. This means more people are unable
to pay off or reduce their short-term debt.
The housing boom is spurring a spate of mortgage loanslong-term
debt. Some of these loans are fixed at exceedingly low rates
of two per cent. Other people have to access mortgages for
more expensive properties at much higher rates. One of the
hidden problems with house mortgages is the cost of maintenance.
Many people borrow to acquire a first home at their maximum
limit and have serious cash flow challenges. They can find
themselves in a vicious spiral. Move-in normally occurs
without full furnishing, so for several months, new fixtures,
curtains, water tanks and pumps, landscaping, eat up disposable
income. Then living expenses go up and children become more
Many homeowners struggle to upkeep the property. They forego
a new coat of paint and routine maintenance on the building.
This is a trap that results from poor planning.
There is one systematic way to avoid the trap: it is to
choose cash value insurance to cover the mortgage loan.
Normally the recommendation to cover the mortgage is term
insurance, because it is cheapest. But in light of the changing
consumer experiences, term insurance may not be the most
cost effective way to cover with risk.
What exactly is the risk?
To borrow the money you must have collateral. This collateral
is commonly in the form of life insurance. Without it, the
lenders will seize your property should you die before you
pay off the loan.
Homeowners will not like this to happen, since their families
will be out in the rain, so they insure the loan.
Optimum planning strategies will incorporate into the insurance
plan, a systematic savings element that will furnish a quantum
of money periodically, say every ten years for property
upkeep. The three common items are: the roof, repainting
and the kitchen cabinets.
The old ideas of hoping to get another loan or using money
saved for such maintenance are not working out since cost
of living day to day is increasing too rapidly.
Another new rule in managing mortgages better is the concept
of buying down the debt. This involves paying off more than
the monthly instalment as soon as you can, especially now
that there is no tax incentive for mortgages.
You want to get past the mortgage, so that you can pump
more into your pension or annuity, where there is a bigger
Borrowing is a fact of the modern era, and many of us spend
more, with the hope of acquiring assets.
Remember you have to maintain the asset, if you want to
develop an estate that is worthy of your heirs.