Entering Debt in the Projections

On the Debts page, you can add various debts and set-up automatic repayment. We will start with entering the debts in the projections, discuss how each setting affects your projections, and then we will show a simple example.

To add a new debt, navigate to Scenario Setup -> Debts and click Add Debt.

Indicate the Balance owing as of the start of the first year of projections, the Interest Rate and Repayment Options.

You have two repayment options available on this screen:

• Interest Only - if you select this option, Snap will automatically calculate the Monthly payment on the loan.
• Interest & Principal - with this option, you can enter a custom Monthly loan payments to apply to both interest and principal.

Once set up, you will have further flexibility to edit annual payments on the Planning Page.

Indicate if the interest on the loan is tax-deductible or not. If tax-deductible, then the amount will be included in the total amount of Deductions and displayed in the Taxable Income Details table on the Planning Page.

Lastly, indicate if the debt is linked to a Real Asset in your projections. If linked, and the Real Asset is sold during the projections, any remaining debt at that time will be automatically paid off in the projections.

Additionally, you can choose a Future Start Age but only use this options for loans to be taken out in the future. For example, when purchasing a new home (upgrading). If this is an existing loan, don't enter any start date and just leave it blank. If you enter a date, this loan will be treated as new, creating an inflow of cash on that date.

On the Planning page, the annual debt payments are displayed under the Debts column. For jointly owned debts, each spouse is assigned half of the annual payment. The amount Owing is the amount owing at the end of the year. The amount Paid (Borrowed) shows the total annual payment on the loan (positive amount) or the total additional loan taken that year (negative amount).

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For short-term loans, you may need to convert your interest rate for more accurate results. For example, fixed-rate mortgages in Canada are compounded semi-annually (twice a year), so if you take that interest rate and enter it into Snap without conversion, the results will be inaccurate: the effective rate will be slightly higher and the amortization period will be longer than it should be.

If you have a nominal rate with a different compounding period, you should convert it to an effective rate, and then convert the effective rate to a nominal rate compounded monthly. For example, if a nominal semi-annual mortgage rate is 5.00%, the rate in Snap should be 4.95%. You can use a financial calculator or an online calculator such as Wolfram Alpha.

However, according to FP Canada's Projection Assumption Guidelines, "it is also sensible to use a long-term borrowing rate assumption when projecting the impact of debt on a client’s financial position over the longer term".  Instead of entering the loan's current interest rate, use a long-term borrowing rate.  Click here for details on how to use these projection assumption guidelines in your scenario. 

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Here is a simple example of a debt of $41,000 which is paid off within the first few years of the projections.

In the first year of the projections, you can see that the $900 monthly payments equated to $10,800 paid over the year. At the end of the first year, the amount Owing on this mortgage is $31,038. After paying the $10,800 in debt payments, $26,450 in taxes, John is left with $62,750 for his Base Expenses from his $100,000 Employment Income.

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