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In my work as a mortgage broker, I meet dozens of clients every week. Not too long ago, I met an unusual group of people - they are from the Inland Revenue Authority of Singapore (IRAS).
I received a call from them after The Sunday Times featured me in an article titled ‘At 28, he made his first million’. In the article in Sept 2008, I shared my business experience and investing ideas.
It seems that some people at IRAS also read it - and I hope some of my ideas were useful. They gave me a call, asking me to go to their office.
I duly turned up for the appointment, feeling nervous instead of a sense of anticipation that I feel every time I meet a client.
They wanted to know me better – specifically, what my sources of income have been and whether I had been paying the correct amount of taxes.
The IRAS people asked me questions and I gave my answers. It took half a day but did not end there. I was asked to return on on three subsequent occasions.
I can happily tell everyone about my encounters because I ‘passed’. My income tax reporting was not at fault.
If I had been less than straight on my tax reporting, I would have to pay what I owed plus a penalty. Nowadays, the courts have become stricter and you can read in the newspapers about jail terms for tax evasion.
I think this is a good lesson I would like to share with everyone: Just play it straight.
Some businessmen I have met now may not have played it straight. They own big houses, even bungalows, but have declared their annual income to be only, say, $100,000.
Photo by May Lee.
They called me to discuss their mortgage refinancing options after they have come out of lock-in periods of their mortgages.
As I found they have insufficient proof of income, I normally requested for evidence of liquid assets – mainly cash in bank accounts - of up to 24 months.
That’s what the banks will ask for to assess the credit-worthiness of customers. For some reason or other, I usually don’t end up with their business.
My business experience has enabled me to learn many things about people and life. I am a very motivated learner. One lesson I would like to share is with regards to the use of credit cards.
Credit card traps
I am meeting more customers with credit card problems. There was this couple in their 40s with a combined income of about $5,000 a month. I was amazed that with that level of income, they had bought a condominium costing $550,000 a few years ago.
Some time last year, the husband was retrenched from his sales job. The wife, who worked as a factory supervisor, was declared a bankrupt because she could not continue to pay instalments on the purchase of a Courts product.
They wanted to refinance their mortgage but I knew the banks would not take their case. They thought of selling their property but changed their mind because it wasn’t going to fetch a good price in a recession. In the end, they moved out to a HDB flat, and rented out their condominium. Fortunately also, they have combined CPF savings that can last them for about four years.
Credit card problems usually crop up because people like to spend on luxury goods, and they tend to pay the minimum amount every month. The outstanding amount gets hit by an annual 24% interest charge.
Sometimes they do not pay at all, and give the bank the excuse that they were out of town and they missed the deadline. Sometimes their spending is so much in a month, they skip the minimum card repayment, thinking that they can pay next month.
For these people, their credit rating with the Credit Bureau (Singapore) is less than ideal, and even if they eventually pay off their loans, this unfavourable rating will stick with them for at least a year before they can start off on a clean slate. Never compromise on your credit reputation. Credit worthiness can really come in handy when the need arises, such as when you want to refinance your mortgage or take an overdraft.
Refinancing challenges
If you are a home owner, it is recommended that you maintain a bank balance that is more than sufficient to service 12 months of your home loan. For example, if the monthly instalment on your mortgage is $ 2,500, you should maintain a $30,000 balance to ensure that you can service your loan comfortably.
Typically, banks will not ‘disturb’ you if you are consistent in repaying your loan, even in a falling market when your home value is falling.
Since August 2007, valuations of properties in prime areas have fallen 40-50%! For mass market properties, the fall has been around 20%. My own condominium in the Novena area has fallen from $1.5 million to $900,000 in value, which is a 40% plunge.
I foresee that in the next two years, obtaining refinancing could be difficult for people whose properties have fallen a lot in value. If you don’t intend to sell your property anytime soon, I advise you to go for a longer lock-in period for your mortgage. The longest long-up period is four years.
The reason is every time you do a refinancing, the bank will do a revaluation of your property. What if your property value has dropped? You may have to do a top-up, or be asked to pay a higher interest rate.
A longer lock-up period now comes with lower interest rates.
If a bank decides that your income can’t meet its debt servicing ratio, the bank would ask to see the transaction history of your cash accounts for the past 12 months. They would be happy to see a steady level of cash of about a year’s worth. What they don’t want to see is an account balance that swings from being very low to high, and back and forth.
Bryan Ong is director of BC Group, a leading mortgage broker in Singapore. To watch a Channel News Asia programme on him, click www.bcgroup.com.sg
