Money Matters

1. A call came from a client who recently acquired a house in Serene Park and was re-looking at his MRTA (Mortgage Reducing Term Assurance) options.
   
2. From our previous dealings, we have suggested to take MLTA (Mortgage Level Term Assurance) instead, to which he is agreeable after balancing the pro’s and cons of the plan. He was also looking at a plan that covers Critical Illnesses (CI) rather than the basic coverage of Death & Disability.
   
3. The new loan was at RM265k. Around a year ago, he acquired an apartment which carried a RM200k loan and he took up an MLTA plan to mitigate the risk.
   
4. As our meeting went on, he informed us that the apartment has been since been sold off and was in the process of changing hands. This transaction was expected to be completed in about 3 month’s time.
   
5. The question thus is, how much should he take for the new loan in view of the soon to be completed disposal? Should he re-cycle the previous MLTA and just top up the difference of RM65k or take a plan for the full RM265k since the previous unit has yet to be disposed in its entirety?
   
6. If one is paranoid, then, the new MLTA should be at RM265k. However, this may be an overkill since the apartment is already on its way out. There is such thing as risk and then there is calculated risk.
   
7. We explained to him that, when it comes to property investment, it may not be practical to insure the entire amount of loan for all properties. In practice, one should categorise properties as core holdings and trade commodities.
   
8. The core units should be protected in full as the primary intention is for long term retention (for self use or rent collection) while the other group is held with the aim of disposal should the right situation arise.
   
9. Examples of core units are the house one resides in, the office one operates from as well as other units that are meant for portfolio building.
   
10. He thus concluded that the house is a core unit that must be protected from risk and the apartment as a trade item. We suggested that he performs this core/non-core asset exercise periodically to gauge his risk exposure and the mitigating action needed.
    
11. In the end, he decided to take an additional coverage of RM100k instead. The rationale was to have an additional RM35k for the family even after the house loan has been settled in full.
    
12. We suppose, when one is a husband/father, leaving something extra behind as a parting gift is the least one can do.
    
13. Loans are a good financial tool but just like fire, if precautions are not there, it can burn the house down. Happy investing!