Buying in Singapore, Finance

A homeowner on a freelance income – can it be done?

June 15, 2017
Calculator and money

Source: Pixabay

Freelancing is like being in a fortress. A lot of the people outside wish they could get in, and a lot of people inside wish they could get out. Regardless of how you ended up being a freelancer / contract worker / portfolio job worker, you might be worried about the whole “down payment and mortgage” situation. Here’re some steps you can take towards reaching your goal of being a homeowner:

  1. Don’t under-declare your income

Don’t claim to make less than you really do. First off, it’s illegal; you’re required to contribute a minimum sum to your Medisave at least, and tax evasion is frowned upon. But that’s not our field.

We’re here to tell you that, property-wise, you can forget about getting a home loan if you don’t properly declare your income. In order to get a mortgage, the bank checks that loan repayments won’t exceed 60 percent of your monthly income, inclusive of all your debts.

So if you’re making $4,000 a month, you’d only be able to take a loan with a total repayment of $2,400 a month. If you officially make $0 a month, guess how much loan you can take.

(Actually the answer is $500, since most banks don’t check if you’re borrowing $500 or less; but we doubt that helps for all intents and purposes here.)

Furthermore, self-employed people have a 30 percent haircut on their salary. So if you make $4,000 a month, the bank considers you as making $2,800 a month. As such, your maximum monthly repayment amount is $1,680.

For illustration purposes, a three-room flat costs about $300,000. You can borrow up to 90 percent of this with a HDB loan, so you’d get $270,000 from the bank. Over 25 years at 2.6 percent interest (standard for HDB loans), you’d be paying around $1,225 per month.

If you were to under-declare your income (e.g. claim you earn $1,500 a month instead of the actual $4,000 a month), you wouldn’t be able to take a loan for the three-room flat mentioned above.

Also, did we mention it’s illegal to lie about your income? We feel that it’s imperative to stress upon this point again.

  1. Do make voluntary CPF contributions, when you get a windfall

If you have had a good month at work with lots of clients, or won the lottery, or received some kind of windfall, consider putting it in your CPF.

Your CPF Ordinary Account (OA) is used to make the down payment on your flat, and it’s also used to make monthly mortgage repayments (unless you’re one of the rare people who want to pay for it in cash).

If you take a bank loan for your flat, your CPF OA can finance up to 15 percent of your property down payment, with the remaining five percent to be paid for in cash.

If you get a HDB loan, your CPF OA can finance up to 10 percent of your property loan, but if HDB grants you a loan of up to 90 percent, you might not have to fork out any cash at all.

Your CPF OA is also used for fees like conveyancing or refinancing, so you do want to keep a healthy amount in there.

  1. Consider getting an endowment plan to meet the down-payment

Endowment plans are insurance policies, which provide a lump sum pay-out after a certain number of years. You can plan ahead to meet the down payment on your flat, such as by taking a 10-year endowment plan.

But wait, we mentioned in point 2 that your CPF OA can be used for the down payment right? So why do you also need to save up for it?

The reason is that banks aren’t obliged to loan you the full 80 per cent of your property value. Likewise, HDB doesn’t have to lend you the full 90 per cent. Depending on your credit score – and sometimes based on your self-employment status – you may get a loan of just 75 per cent of the value of your property.

Having an endowment plan can help make up the difference. In the event you don’t need it, you can use the endowment plan to:

(1) Make a bigger down payment, thus paying less every month

(2) Keep the down payment as an emergency fund (see point 6).

As an aside to buying an endowment plan, you can also consider ETFs and Singapore Savings Bonds. Talk to a wealth manager for more options.

  1. Keep your accounts sorted

Hire an accountant if you must, but keep your accounts in order. You must be able to produce invoices, receipts, tax statements, and so forth to prove your income to the bank.

An easy way to find you what you need is to walk into a bank right now, and tell them you want In-Principle Approval for a mortgage (this is a promise to lend you a sum of money, if you buy a house within a week of getting it).

The mortgage bankers will ask you to produce certain documents if you let them know you’re self-employed. Take note of what you’re being asked for, and have those documents ready when it’s time to submit your loan application for real.

In general, you’ll need at least your tax statement from IRAS (see point 1), and proof of income (e.g. invoices / receipts to and from registered companies) dating back 12 months.

  1. Work like a lunatic, in the year leading up to becoming a homeowner

The year before you make a loan application, work yourself to the bone. Forget vacations, all you need to remember is that sleep and rest are for the weak. Take on a few more clients than you normally would, or do more for the ones you have so you can charge a higher fee.

The idea is to ramp up your income as much as you can before the application, so that you qualify for a larger loan amount. It’s okay if you can’t sustain the pace of work beyond the year; you may choose to wind things down once your loan is approved.

Of course, a nice bonus is that you’ll make more money that year, which can go into your savings; you’ll need that now that you have a regular mortgage to service.

  1. Make sure you have enough reserves to service the mortgage and maintenance for six months, even if your income source were to end

Always make sure you have an emergency fund, which can cover six months of the mortgage. Freelancer incomes fluctuate, and sometimes stop – in the worst-case scenario, the emergency fund will buy you time to find a tenant (or offload the property at a decent price and downgrade).

Don’t forget to factor in conservancy and maintenance fees.

  1. Incorporate a company and pay yourself a salary

One option, to make getting loans easier, is to incorporate your business (visit the ACCRA website for more details). You can then pay yourself a salary from that business and move one step closer to being a homeowner.

Try to make your paycheque consistent. For example, say you pay yourself a salary of $3,00 a month. On good months, when you make $5,000, still pay yourself the said $3,000, and leave the extra $2,000 as retained earnings. During slow months, you can tap this surplus cash to maintain your income at $3,000. Try to avoid an erratic income level that, if charted, resembles an ECG of someone having a heart attack.

You can consider paying yourself more, in the year leading up to your loan application.

 

 

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