How a S$3,000 bill became S$30,000

Read the full article from CNA here –How a S$3,000 bill became S$30,000?

One of the challenges in advising a client is managing the cash flow. The big purchases such as a holiday can be controlled but it is difficult to manage fixed expenses such as these tiny little installments that add up to an amount that ends up more than the income.

Personally I don’t mind installment free payment via credit cards but those in-house credit facilities is a No-No! My advice to my clients is if there is no ready cash, go for a lower priced item and save up to buy the ideal model. For e.g. if a TV cost $1,200, a 12-month installment will works out to around $125/mth. Try to save that amount for a year instead of committing to the loan. 2 possible scenarios-

1) You saved for 6 months and find that it’s not possible cos you over-budgeted. You are still richer by $750.

2) You managed to save $125 for 12 months. That’s $1500! You can buy a better or newer model 🙂

If we had just jump into the credit facilities, we are stuck with just bad debts and a depreciating equipment.

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Does a smaller loan on your property makes sense?

The outlook for mortgage rates is that the rates are expected to go up. It is a known fact the mortgage rates have a significant impact on the cost of buying a home. When the rates increase, your monthly payments go up. A 5 basis point change in the rates can be significant in the long run especially the loan size is huge.  Assuming a loan of $1,000,000 at 1.60% increased to 1.65% will see an installment repayment from $3,499 to $3,524 over 30 years. Thus, consumers are always concern about the rates. While mortgage rates is beyond our control, we can decide on another major factor that affects the repayment installment i.e. the amount of loan to commit. A common decision to be made by property buyers is should they pay more upfront and take a smaller loan or should they pay less upfront and hold more cash for liquidity. But there is no right or wrong answers to that decision. On top of the investment opportunity to generate a better returns than the mortgage rates, it also depends on a person’s mindset to be debt free.

Let me share one of my client’s situation and you decide what you will do. We shall call him Mr. Million.

Mr. Million had purchased a property and took a 30 years mortgage loan of $1,000,000 at 1.6% p.a. The monthly repayment as well as the total repayment amount is as follow.

1 mil 30 yrs

The monthly installment is $3,499. The total interest paid will be $259,781.

Mr. Million have a spare cash of $150,000 and he was unable to decide to reduce the loan to $850,000 or just hold that cash and re-invest it.

Option 1: If he choose to reduce it by $150,000.

850-30

Advantage:

  1. He reduces the monthly installment to $2,995
  2. The total repayment is reduce to $228,233

Con:

  1. He lose the liquidity of $150,000 for liquidity
  2. The $150,000 can serve as a backup fund for his monthly installment of $3,499 if needed.

 

Option 2: If he choose to take a $1,000,000 loan and set aside the $150,000 with (i) guaranteed 1.7% p.a. over 3 years or (ii) a guaranteed 2.08% p.a. over 5 years.

1 mil 3 yrs

(i) After repaying $3,499 monthly for 3 years, the remaining loan amount will be $920,175.

The $150,000 would have grown to $157, 875 after 3 years. He can do a capital reduction or re-financing when the lock-in period cease. With that, the new loan amount will be $762,300.

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This will reduce the monthly installment to $2,899 and a total repayment interest of $176,976.

(ii) Alternatively, he can hold this $150,000 over 5 years at a rate of 2.08% p.a.

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After repaying $3,499 monthly for 5 years, the remaining loan amount will be $864,790.

The $150,000 would have grown to $162,900 after 5 years. He can do a capital reduction or re-financing when the lock-in period cease. With that, the new loan amount will be $701,890.

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This will reduce the monthly installment to $2,840 and a total repayment interest of $150,173.

So, what does all these means? Below is a summary:

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In conclusion, while we were taught to  take up a lowest possible loan to reduce our liabilities, it is always good to look at the opportunity cost. There is no best option. It depends on a person’s preference to have the lowest liability, pay the least interest or pay the least cash outlay.

Do note the above scenario is assuming the interest rate remains at 1.6% through out the repayment period. The results may change accordingly to the various factors and you might want to do a proper assessment first before deciding the best course of action.

 

 

 

Mental Capacity Act

Imagine this – You have a sum of money in a bank but the bank refuse to let you withdraw it because the staff felt you do not have the mental capacity to manage it. If you think this sounds ridiculous, you many want to know this is a real case which happen a decade ago.

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(The link to the full story had broken but you can read the full legal suit between Mdm. Hwang vs OCBC via here. )

While most of us do not have that $8.8 million in banks now, we can neither assume we will not have it in future nor we will not suffer from dementia.  With more and more elderly in Singapore and such incidents will become more common, the Mental Capacity Act was enacted in 2008.  This Act allows a person to appoint someone to act on his behalf when he does not have the capacity to make a decision for himself due to mental incapacity. The Parliament amended the Mental Capacity Act in 2016 to allow paid professionals to make key decisions for those who can no longer decide for themselves as there are more elderly without any family members or there may not be any suitable family member who are suitable to handle the elderly’s affairs.

The common concerns when I shared with people on the Mental Capacity Act or more commonly known as Lasting Power Attorney is they are worried the appointed person abuse his authority or takes over his assets etc.  If you wish to know more about the topic of safeguarding your assets and distributing it to the right people in the right way, you may want to attend this session organised by my company.

Here’s a little video on dementia  but Mental Capacity Act is not just about dementia.

If you are interested, just submit the form below and I will help you to register for the session.

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Happy Lunar New Year

Wishing you & your family good health, good luck and much happiness throughout the year.216468-P17MTK-959

Insurance industry in 2016

2016 was a challenging year for the insurance industry. Other than the economical changes that affected the financial sector, FinTech became more common to consumers and they have more choices when it comes to buying an insurance policy. There were several regulatory changes too. So, how did the insurance industry ended in 2016?

According to reports from Life Insurance Association(LIA), the total new business underwritten rose 10% to SGD3.29bn  in the year 2016 from 2015. Out of this amount, SGD 2.26bn were from annual premium products .

Therewas a minor shift in distribution channel of insurance policies as well.

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Common Reporting Standard

January was a busy month for some financial institutions(FIs) as the Common Reporting Standard (CRS) was implemented on the 1st Jan 2017.   The FIs may be banks, specified insurance companies, investment entities and custodial institutions.

For accounts that were opened before 1st Jan 2017, the FIs may contact the account holders to declare their tax residency. This declaration of tax residency will be a standard question in the application forms for any accounts open after 1st Jan 2017. In short, there is nothing you need to do if the FIs did not send you any forms to update your tax residency.

  • What is Common Reporting Standard?

The CRS is an internationally agreed standard for the automatic exchange of information on financial accounts between jurisdictions for tax purposes. It is to enhance tax transparency to detect and deter tax evasion through the use of offshore bank accounts.

  • How is a person’s tax residency determined?

It is oftenly mistaken that a person’s citizenship is the same as the tax residency.

For the purpose of tax, a person’s citizenship is secondary. In general, the tax residency of an individual is determined by the person’s physical presence or duration of stay in a jurisdiction in a year. You are a tax resident if your stay in that jurisdiction exceed 183 days in a year.

  • How CRS works?

(Source:www.newgensoft.com)

 

Please speak to your tax professional if you need more clarification and for more information on CRS, please visit IRAS.

IBF Standards

The IBF Standards are a set of competency standards for financial skills. It is a comprehensive quality assurance framework with both an accreditation and a certification system.

There are 3 levels of IBF Certifications as shown below.

certification_process(source:www.ibf.org.sg)

 

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More information on can be shared from this YouTube clip

Funny incidents at work

Sharing some funny incidents that happen in the course of work.

1) I was explaining a medical plan to a prospect…
Me: This plan will cover you globally, 24 hours per day.
Prospect: You mean I cannot claim anything if I’m injured on the 25th hour?

2) There’s a medical plan with an accumulative annual limit of USD850. You can use it for Mammogram, PAP smear test, Colon cancer screen, Prostrate cancer screen & other prevention test. After explaining, Prospect cited an example.
Prospect: Does that mean if I claim $200 for PAP Smear, the max I can claim for Prostate cancer screen is $650?
Me: Technically you are right but that is very unlikely to happen….

3) There is a particular critical illness plan provide benefits for Death, Total & Permanent Disability(TPD) and multiple critical illness claims as compare to most that will terminate once you make a claim. For e.g. in most policy where a insured claims say Major cancer, the policy will terminates once the payout is successful. This policy allows the claims for Major Cancer to be paid and if the insured suffered stroke, he can claim for stroke again.

The prospect understood the plan well and then asked,” How about death & TPD? Can do multiple claims?”

 

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Happy Lunar New Year

cny

快马扬鞭迎羊年,羊年转眼身边到。

事业走上羊关道,志得意满人欢笑。

夫妻恩爱人羡慕,幸福生活总围绕。

健健康康无烦恼,羊年大吉乐淘淘!

May you have a year filled with good health & plenty of wealth.
Wish you success in your career and happiness of your family!
Have a Happy Lunar New Year & a Happy Holiday!

Lunar New Year cards

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Lunar New Year cards for my Chinese Clients. All ready to be mailed!