Why Do You Lose Money When Decoupling to Buy a 2nd Property?

Now, what is decoupling and how does it happen?

Decoupling happens when the joint ownership of a property is severed in order to allow you the chance to purchase another property as a first-time home buyer. For example, if you and your spouse co-own a condo, then you can decouple by buying over all of the shares in property that belong to your spouse, or vice versa.

While decoupling also involves the refinancing and restructuring of the home loan to be set under one spouse in name, it is important to note that this is a different situation than when restructuring your home loan to remove a co-borrower. This is because removing a co-borrower doesn’t require one of the pair to buy over the property share of the other person.

The main reason for decoupling is in order to avoid the ABSD. At the moment, the ABSD imposes a 12% tax on the second property for Singaporean citizens. For Permanent Residents, the tax imposed is at 15%.

Now, if your spouse were to fully transfer the property to you or vice versa, they will officially no longer own the property. Thus, it is now possible for them to purchase another property as if they were a first-time buyer, without having to pay the ABSD. As such, this allows the non-owner to obtain a higher loan amount for property purchasing under their current Loan-to-value (LTV) limit.

Regarding decoupling costs, there are certain main factors that may affect the cost. The factors that may affect the decoupling costs include conveyancing fees, stamp duties, prepayment penalties, and refund to CPF.

Below are the detailed explanations of how these factors may affect your decoupling costs:

1. Conveyancing Fees

The decoupling conveyancing fees range from $5,500 to $6,500. For those involving a mortgage broker during the process, they can typically help you find the cheapest available options. It should be noted that the mortgage broke is one of the few things that are completely free in this situation.

2. Stamp Duties

The Buyers Stamp Duty (BSD) applies to the share of the property being transferred over. For example, when your spouse buys over the share of the property you own, or vice versa, they must then pay BSD on the share that is being transferred.

Thus, if your existing property value is at $1 million, and you have an equal ownership with a 50/50 split, the spouse that is taking over the existing property would have to pay BSD based on a value of $500,000; which in this case comes to $9,600.

It should be noted that stamp duties always apply to the higher market value of either property price or property value. This way, you can’t cheat and try to sell your half for only $1 and your spouse must at least buy over the half you own at market value.

Besides that, if your spouse is not a Singapore citizen, or if they already own another property and is buying over your share, then you will need to take into account the Additional Buyers Stamp Duty (ABSD).

For example, Permanent Residents pay up to 5% ABSD on their first property purchase, so if your spouse is a PR and buying over your share of the $1 million unit, they will have to pay an additional $50,000.

On the other hand, if your spouse already has ownership of another property, they will have to pay up to 12% (Singapore citizen) or 15% (PR) of the ABSD on the transferred property. This will amount to $120,000 or $150,000 respectively, in order to buy over your half of the $1 million property.

In the end, you will also need to consider the Sellers Stamp Duty (SSD). This is especially so if decoupling is done within the first three years of the property purchase. The first year amounts to 12%, the second year 8%, and the third year is at 4%.

After that, there is no payable SSD, so most couples tend to wait and hold on to a property for a minimum of three whole years before deciding to decouple.

3. Prepayment Penalties

This may or may not be a factor depending on your home loan package. This is because most home loans tend to impose prepayment or early redemption penalties, typically within the first three years. This added fee is for those that try to pay off their home loan early.

Unfortunately, when refinancing your home loan, the existing home loan must be paid off and a new one must be created for the spouse taking over the existing property. In this way, the prepayment penalty (typically 1.5% of the prepaid amount) will come into effect when paying off the old loan.

Considerations

Knowing the terms and conditions of your home loan is vital, as the prepayment penalty may apply within the first three years or even last as long as five years with certain loans.

4. Refunding to CPF Account

The amount used from CPF for any kind of property purchase must be returned with accrued interest when the property is sold. This amount must be known or else you may very well end up with zero cash proceeds.

Now for example, you have to return $170,000 to CPF after selling your share of the property to your spouse. However, the proceeds only amount to $160,000. While you are not required to top up the $10,000 shortfall if you sold the property at market value or more, it does mean that the cash will all return to your CPF.

So, when buying your next property, it is best to remember that you will have to pay at least 5% of the price in cash, which may not be feasible if your funds all get locked up in your CPF account.

All in all, decoupling can mean you and your spouse may end up with a more expensive total compared to the ABSD. This is especially so if you or your spouse aren’t Singaporean citizens, if the person buying over the share already owns property, if the second property intended to be bought is much cheaper than existing property, if you are within the SSD period, or if you could incur steep prepayment penalties on the home loan.

As such, before you and your spouse decide to decouple in the future, it is best to consult with a real estate agent or a qualified financial advisor in order to work out your financial options.