Question: My bank charges a fee known as 'minimum balance fee' on savings accounts when the balance is below the $2,000 minimum required to open such an account. This fee attracts GCT. Another fee, plus GCT, is also charged on current accounts when cheques are drawn against uncleared effects.
Whether these charges are fair is arguable, but on what is GCT being charged? In my mind, these are penalties, not goods or services. What service is the bank providing for these charges? The GCT office does not charge tax on its penalties, so why is the bank doing so?
- S. Phillips
PFA: The bank charges the minimum balance fee to put it in a position to meet the basic variable costs - administrative and operational - that it incurs to maintain accounts with balances below the required minimum. The income generated by such accounts is often insufficient to cover the costs of maintaining them.
When a bank pays against uncleared effects, it accepts a credit risk by advancing funds on behalf of a customer before his/her cheque has been cleared by the paying bank. It charges a fee for the risk it accepts on behalf of its customer.
Your bank provides the service of maintaining your account in one instance, and provides the service of advancing funds on your behalf in the other and, therefore, charges general consumption tax in accordance with the provisions of the GCT Act.
The Tax Payer Audit and Assessment Department confirms that unless specifically exempted by the relevant act, all service charges and commissions charged by the bank are subject to GCT.
This is a value-added tax that the account holder pays for consuming the service provided by the bank.
The bank does not benefit from the tax. It, too, pays GCT on services it purchases and pays over to the government the net of what it collects and what it pays out.
Affording an $8m homeQuestion: Saving to buy a home is my biggest challenge. The hypothetical home I would like to purchase is one of the units in the Caribbean Housing Estate, currently being sold for over $8 million. The building societies tell me I do not qualify for a loan based on my current salary, which I find ridiculous since my salary is better than that of the average person. I'm not even sure what my next move should be. Let me know if you have any insight to share on this matter.
- K. Henry
PFA: Building societies generally require that the monthly mortgage payment not exceed 35 per cent of the gross income of borrowers to satisfy their affordability test.
They may allow a debt-service ratio of 40 per cent inclusive of other long-term debt (due to be repaid in more than 12 months). One building society, which offers 100 per cent financing, requires borrowers to earn four times the amount of the mortgage payment.
Building societies want to be satisfied that the earnings of borrowers are stable because they want to be assured that funds are available to make mortgage payments when due. This may put commission-based employees and some business persons at a disadvantage.
Borrowers are expected to have enough funds to make the deposit, usually 15 per cent of the purchase price, and to cover closing costs, including attorney's fees, stamp duty and registration fee, which can be as much as 13 per cent of purchase price.
Here are some courses open to you. Utilise your National Housing Trust benefit. You may borrow $3.5 million, plus an additional five per cent of that, $175,000, to assist with costs. Building societies will match that figure if your income is adequate.
Team up
Join with another person. Both of you can utilise that benefit and borrow the maximum allowed from the trust through your building society. Alternatively, ask somebody whose income is sufficient to pass the affordability test but who is willing not to be a co-owner of the house, to guarantee the loan.
Are you able to make a bigger deposit? Are there assets you can sell to be able to do so and thereby borrow less?
If you are young and have good earnings prospects, consider the graduated payment mortgage. Your early monthly payments will be low. Later payments will be higher, however, because the portion of interest not paid each month is added to the principal. Consider this only as a short-term option.
If you really cannot afford your chosen house, consider settling for one that costs less, or find ways to increase your income.
Write to your Personal Financial Adviser, Oran A. Hall, for free advice and counsel at finviser.jm@gmail.com.
