Debts are paid down and eventually paid off on schedule, based on a combination of the debt's current balance, its term and interest rate, all of which are set on the Debt screen.
A debt will be paid down over the course of its term based on the amount of the scheduled payment, provided that the debt is not an interest-only mortgage and that your client has the funds to make future payments.
Debts will also be paid off automatically when:
Linked to a property and that property is sold, in which case proceeds from the sale will be used to pay off any outstanding balance on the linked debt;
The sole person responsible for the debt dies, in which case the debt will be repaid from that person's estate.
How to schedule the payoff of a debt
The option is also available to schedule the payoff of a debt at a given event.
For example, your client plans to take a sizable tax free cash withdrawal from his money purchase when he retires, and would like to use those funds, if they are sufficient, to pay off the mortgage on his home.
To start, you may need to add an event to the timeline to schedule the payoff, provided that there is not already an event on the timeline that could be used.
1. Go to the Time screen to drag and drop an event onto the appropriate age/year of the timeline below.
2. To schedule this payoff, go to the Debts screen.
3. Select the debt in the ledger to the right of the screen, provided that you have already entered it into the plan.
4. Expand Advanced Settings and select Payoff.
5. Select a Payoff Event in the drop down lost at the top of the panel. This will schedule the attempted payoff.
An option is also available to select one or more preferred payment sources for the debt payoff if you would like funds to be drawn from particular accounts or even certain income sources.
To do this click Add and then select the preferred payment source from the dropdown list which appears. Repeat this to add as many payment sources as you require. The arrows can be used to sort these payment sources in descending order of preference.
Preferred payment sources are strictly optional. Otherwise, the software's usual expense fulfillment logic will be used to determine where the funds will come from to pay off the debt.
6. Click OK or the X to close the panel.
7. Click Update or Add to save your changes.
If the Preferred payment source has insufficient resources the software's usual expense fulfillment logic will come in to play to pay off the debt.
Where to view details of a debt payoff in the Let's See charts
1. Go to the Let's See charts to view the details of the debt payoff and to confirm that the debt has indeed been paid off.
2. First check the Cash Flow chart.
Insufficient Funds: If the income and liquid assets available in that year of the plan are not enough to cover the full payoff of the debt, the software will pay down as much as it can on the debt, a red shortfall will be shown in that year of the cash flow chart, and regular payments on the debt will resume in the following year of the plan.
3. Click the bar/year of the chart in which the debt is scheduled to be paid off.
The chart legend will display in the middle of the screen.
4. Click Detailed Info.
The chart details panel will display.
The Debts tab should show the full payment made on the debt and a remaining balance of 0, provided that adequate funds were available to pay off the debt.
The Property tab should note zero debts held against the property, provided that adequate funds were available to pay off the mortgage and that your client does not have multiple debts secured against the property.
Your client's equity in the property -- the property's value minus debts held against it -- should increase to match the full market value of the property at that point in the future, again provided that your client does not have multiple debts secured against the property.
The Expenses tab will show a home mortgage payment that is inclusive of the scheduled regular payment, the year's interest, and the additional funds used to pay off the debt.
The Debts chart should indicate a sudden drop off in debt due to the payoff.