August 28, 2007, 7:00 am

The Way Banks Look At You Part 6: Calculating Your Net Worth

by: The Financial Blogger    Category: Banks and You
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I do not think this post is only related to banks and their perception of your own personal file. It could definitely help you out completing a balance sheet and understanding where you at, where do you want to be and how to get there. Whatever your financial goals are, you need a map to know where you are going. Calculating your net worth is one of the indicators on your financial rally map.

What are your assets?

Sorry to disappoint you but your grandmother’s 10K ring does not really count for a banker. Even with a valid certificate, jewellery, antiques or art collection are rarely considered for what they are. How about vehicles? Hum… do you really give a value to something that depreciates by at the very least 10% per year? I would say that car value is offsetting the car loan… not more than that. If cars, fifth wheels and boats are the bulk of your assets, you will not be considered as a high net worth client for the bank.

What matters then? Tangible and marketable assets. Banks’ favourite are registered and non-registered investments. Mutual funds are more praised than stocks but the full value will be appointed to your balance sheet in both cases. You property is definitely one of your biggest asset according to banks. However, it is not very liquid. Financial institutions love to be reassured by liquid assets that can cover for any bad period of your life. Stocks held within an employer’s contribution plan will be taken in the calculation only if they are vested shares.

Your pension plan, LIRA or locked-in RRSP will be taken into consideration but not added to your balance sheet. Why is that? It is simply because it is not an accessible asset over a short period of time. Even if you are on a verge of a bankruptcy, the Government will not give you access to your pension plan.

As a summary, take your bank account statements, registered and non-registered investments, the fair market value of your properties (please stay conservative) and your vehicles (then again, offset your car loan but do not push your luck) and you will get your total assets. Please note that if you apply by yourself and you have joint assets with your spouse, only half of the asset (and the liability) will be included in your balance sheet. Unfortunately, liabilities will also show on your balance sheet.

What are your debts?

Debts are easier to distinguish. However, some details must be mentioned. Basically, anything that you are liable to should be shown on your balance sheet. That includes credit card and line of credit balances, any type of personal loans (which includes car loan, student loan, consolidation loan, etc), mortgages and HELOC. Leases or alimonies will be considered into your TDSR calculation but it will not affect your net worth.

What is the final result?

Banks are looking to lend to people with positive financial net worth. They are searching for liquid and stable assets. You might have a positive net worth, if have of it is invested in penny stocks, good luck convincing your banker that they actually worth something! If you are young, ie below 30, I would not be worry to much about having a positive net worth. Financial institutions also understand that you need time to pay off your student loans and show some assets on your balance sheet. Having a co-applicant could help getting your way through if it is the only issue. Even if it sucks to have daddy on the loan, sometimes you are better off putting your ego aside and getting the appropriate financing.

As it is the case with the company’s financials, a personal balance sheet is a picture taken of your financial situation at a given moment. Establishing your net worth on a yearly basis will help you out fixing financial goals and measure if previous year’s objectives were met on time. This constitutes an interesting way of determining your state of financial health overtime.

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Comments

That’s interesting that banks will give full value to stocks that you own (not counting pennies of course).

Would the home buyers repayment count on the debt side?

Mike

by: The Financial Blogger | August 28th, 2007 (1:49 pm)

FP,
The Home buyers repayment is not considered a debt as you still have the choice to not repay the amount withdrawn from your RRSP (and get taxed on it). Further more, this money will be reinvested in funds, which won’t affect your net worth in a bad way. Banks don’t look at HBP to calculate your TDSR or your Net Worth.