In Singapore, the word decoupling is extremely common. Fortunately, it has nothing to do with getting a divorce. On the contrary, it is a topic couples discuss when trying to strengthen their future together.
Decoupling has become synonymous with investing in a second residential property as a couple, while bypassing the exorbitant 17% Additional Buyer’s Stamp Duty (ABSD) we have to pay. The main reason couples need to spend time and energy with this protracted strategy is because we can easily save several hundred thousand dollars on the investment.
In a sense, couples are forced to think of such a strategy because of the ABSD, which was implemented in 2011, as part of a slate of property cooling measures introduced by the government. Prior to this, couples could invest in multiple properties without having to pay anything beyond the normal Buyer’s Stamp Duty.
How Does The Decoupling Strategy Work?
As couples tend to own properties together – bought when we either weren’t affluent enough to contemplate a future property investment or because we simply didn’t know better – we have to fork out the ABSD when purchasing a subsequent residential property.
The gist of the strategy is to separate a couple’s ownership status of each of the two property. Thus, each partner will only be purchasing their first properties, while we are able to own two properties as a couple.
There are two main ways to separate our ownership status. If we own an HDB flat, we typically would have to sell the property, and use the proceeds in cash and CPF Ordinary Account (OA) funds to purchase two separate properties under each partner’s name. If we own a private property, we can also opt to transfer the ownership status of one partner to the other partner, freeing up one person’s name to purchase his or her first residential property without incurring the ABSD.
As you may already be able to tell, this may not be a straightforward decision for couples with many variables involved. Here are 5 potential pitfalls if we haven’t planned properly.
#1 There Are Potentially Hefty Costs Involved – So We Need To Ensure It’s Worth Decoupling
As there may be potentially hefty costs involved when decoupling, we need to ensure that it is worth taking the step to be in a better financial position.
Before even thinking of decoupling, we need to complete our Minimum Occupancy Period (MOP) of five years if we are considering an upgrade from our HDB flat.
If we want to sell or transfer ownership of a condominium, we may have to fork out a Seller’s Stamp Duty (SSD) of between 4% and 12% of our property price – another property cooling measure – if we are doing this within three years of purchasing our home. The person buying their partner’s share of a condominium also has to pay a Buyer’s Stamp Duty on the value they are purchasing.
If a couple currently owns two properties, and want to free up one spouse’s name to buy another property, this strategy may not be valuable as the person purchasing their spouse’s stake will have to pay ABSD on both properties.
There are also lawyer’s fees, which can amount to more than $5,000, we have to pay. We also have to consider penalties and fees for discharging our current bank loan.
#2 Funds Will Be Channelled Back Into “Seller’s” CPF OA
Once we sell our property or transfer a share of a property to one partner, the amount we utilised from our CPF OA will flow back, along with accrued interest.
If we sell our property to purchase two new properties, we may encounter a situation of different amounts flowing back into our CPF OA. This may restrict our ability to afford a downpayment if the amount is vastly different and we had intended to use our CPF OA funds to pay for the new home purchases.
Similarly, if we are transferring ownership from one person to another, the partner transferring the property would require his or her funds to be channelled back into their CPF OA. This may require a substantial amount that is still locked in the property to be paid into the person’s CPF OA in cash. Furthermore, we still need to remember that we have to fork out a minimum of 5% of any new condominium purchase in cash.
#3 Have To Consider Total Debt Servicing Ratio (TDSR)
When we buy a property, we usually have to take a home loan. Our home loan is restricted by a Total Debt Servicing ratio (TDSR) – which sets a threshold for property loans at a maximum of 55% of the borrower’s monthly income.
If partners earn a substantially different amount or one of the partner is a stay-at-home parent, we may face restrictions in getting a sufficient home loan for that person to buy a property under their name alone.
Of course, couples can find workarounds, by paying a larger downpayment or fully paying one of the property and stretching the maximum loan on the spouse with a larger earning power. However, we need to be privy of the risks involved in stretching ourselves, especially because the spouse earning more cannot use his or her CPF OA funds to help pay for the property not under his/her name.
Thus, the decoupling strategy may work most optimally for couples that are earning similar amounts.
#4 We Can Only Use Our Own CPF To Pay For The Property Under Our Name
We need to be mindful that in a situation that one of the couple loses their job, the other couple cannot use more of their CPF OA funds to help pay for the monthly home loan.
Of course, they can help pay for it in cash in unfortunate situations, but it is a risk worth noting.
#5 Difference In The Value Of Properties Each Partner Owns
There is a good likelihood that couples will own two properties of different values. In some scenarios, the difference could be a large amount, especially if one of the property is a landed property or a studio, on either side of the spectrum.
The spouse who legally owns the property with a lower value may have contributed quite equally in cash for the couple to be able to own the two properties. Other than just being arbitrary, we also have to consider how this affects us in legacy planning or in the unfortunate situation we get divorced.
While we definitely trust each other, the person who owns the property has absolute authority in selling the property as well as receiving the proceeds even if the other spouse had contributed in cash.
Even if the other spouse had not contributed to the property, there is also a question of asset division in a divorce. It would be a clearer split if a couple owns two properties together.
Even if the couple stay together, there is also a question of legacy planning. The spouse who owns the property again has absolute authority in willing the property to anyone of their choice. The other spouse may not even know about this until it is too late.
Decoupling Is Worthwhile, But We Need To Know The Risks Involved
We are not trying to scare anyone away from decoupling. In fact, we think it can be a good idea for couples who can afford to own two properties.
However, we also think being financially prudent is really important, especially when it comes to such sizeable amounts and the question is the roof over our family’s head. We need to go in with our eyes open.
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