Decoupling property checklist Singapore – 7 point readiness check

Decoupling property checklist Singapore

Table of Contents

Introduction

We hate to admit it but we are all guilty of spending too much time pondering over trivial decisions in our life, i.e. comparing specs for Iphones. While not applying the same rigor when it comes to important decisions like decoupling to purchase a 2nd property.

This article seeks to provide an exhaustive checklist to help ensure that all important considerations have been thought through and all necessary preparation has been made before executing the decoupling process.

This is part of a multi-part series that covers all aspects related to decoupling, for more information refer to our complete guide for decoupling.

Feel free to use this article as a guide to work with your property agent or drop us a text to get assistance from our property decoupling specialist.

Checkpoint #1 – Have you cleared your seller stamp duty wait out period ?

From our experience, the cost of decoupling is often the first stumbling block that determines whether decoupling is a worthwhile endeavour.

For decoupling to make sense, the cost savings from not paying ABSD must be significantly more than the cost of decoupling.

While the cost of decoupling is made up of several components such as buyer stamp duty, early loan redemption penalty and legal fee.

Seller stamp duty is easily one of the most costly components and can easily tilt the balance and increase the cost of decoupling significantly.

Consider the scenario whereby you are looking to decouple a property that is valued at 1.5 million and held in a 50-50 joint ownership.

Referring to the table above if you were to decouple a 1.5 million property and have not held the property for more than 3 years, you will be looking at SSD cost of between $90,000 to $60,000.

Coupling this with the other cost component incurred while decoupling, this could easily become a deal breaker.

So it is important that we avoid this unnecessary cost and only decouple when we have cleared the 3 year holding period to avoid incurring seller stamp duty.

As a sidenote, if you are looking to get your financials calculated for decoupling, head over to our decoupling calculator for a quick preliminary calculation.

Checkpoint #2 – Are you still locked in to your mortgage

Staying inline with the discussion on cost of decoupling, early loan redemption penalty is another cost component that can be avoided when decoupling.

When you secure a mortgage with a bank, there will usually be a 1 to 2 year lock in period. During this locked-in period, you will incur an early loan redemption penalty of 0.75% to 1.5% on the principal amount that you attempt to pay down.

Consider the same example of a couple looking to decouple a property valued at 1.5 million with an outstanding loan of 1.0 million.

The decoupling process will require the couple to restructure their existing mortgage by fully redeeming their existing mortage and replacing it with a new mortgage to be shouldered by one party.

In this case, the couple will incur an early loan redemption penalty of between 0.75% to 1.5% on the 1.0 million outstanding loan, this would amount to a cost of $7,500 to $15,000.

This may not be a sizeable amount relative the scale of purchasing a million dollar property, but it helps to consider this point to ensure that the cost of decoupling is fully optimised.

For more details on the loan restructuring process refer to the following article.

Checkpoint #3 – Have you confirmed that the cost saving from ABSD significantly outweighs the cost of decoupling ?

Given that you have cleared both checkpoints above, you will only need to account for the cost of buyer stamp duty and legal fee.

The key is to ensure that the cost savings from avoiding ABSD on your second property significantly outweighs the cost of decoupling.

With the latest upward revision in ABSD rates on 2nd property, this hurdle will not be a tough one to overcome.

However, from our experience, there are only some fringe cases in which the target property to decouple is of a much greater valuation than the second investment property to be purchased.

Only under such circumstance there is a slim chance whereby the cost of decoupling could exceed the cost saving from not paying ABSD.

In most cases, if your goal is to own a second property. Decoupling is an option that will always trump paying ABSD, from a cost saving perspective.

For a non obligatory consultation to work out your cost of decoupling feel free to contact us with your details via whatsapp using the following link.

Checkpoint #4 – Have you check if there is going to be a deficit in cash proceeds due to CPF refund ?

When decoupling a property, one party is to purchase the other party’s share in the property. The process is similiar to a internal sale and purchase process.

In this process, the cpf utilised by the selling party when initially purchasing the property, has to be refunded back into his or her CPF OA account.

This CPF amount will be deducted from the sales proceed to be received from the buying party.

Having established a common understanding on how CPF refund works. It is important to note that there could be instances where by the selling party has utilised a significant amount of CPF in the current property, and additional cash is required for refund back into the selling party’s CPF account.

Consider the example of a couple owning a private condominium valued at 1.5 million. The couple have structured their ownership in a 99-1 tenancy in common structure, with one party owning 99% share while the other own 1% share.

Assuming the selling party is the party owning 1% share and he or she have utilised $200,000 worth of CPF on the current property, by using her CPF to jointly fund the monthly mortgage of the existing property.

The sale proceed she will receive for her 1% share of the 1.5 million property, will amount to $15,000. Under such circumstances, the couple will need to infuse a further $185,000 worth of cash to cater for the $200,000 CPF refund.

This may not be a favorable situation as it will lead to a cash deficit when it comes to financing the second property purchase.

Hence before proceeding with your plans to decouple, it is important to ascertain if there will potential cash deficit scenario. And if there is, it is important to ensure you have got sufficient cash set aside to cater for the downpayment of the second property to be purchase.

This provides a opportune time for us to segway into checkpoint #5.

Checkpoint #5 – Can you afford the 2nd property ?

Recaping the core objective of why you are even planning to decouple in the first place.

We are looking to purchase a second property without incurring ABSD. And the whole point to purchasing a second property is make a money from both capital gain and rental income.

It will defeat the purpose of decoupling if we fall short when it comes to selecting and purchasing the right investment property.

From our experience, we have came across many instances whereby aspiring property investor decoupled and settled for a sub optimal investment unit due to lack of funds and resulted in sub optimal profit or challenges with selling off the property down the road.

Hence it is important to ensure that you work together with your property agent to select the right investment property and also save up sufficient funds to afford it.

To assess how much you will need to afford your desired investment property you should be considering the following 2 component.

Can you afford the 25% cash and CPF downpayment ?

The first component to consider is whether your proceeds from decoupling and the existing cash and CPF you have on hand is sufficient to cater for the 25% cash and CPF downpayment.

Note, out of this 25%, 5% is mandated to be paid in cash base on MAS regulation.

So for a two bedder valued at 1.4 million, you will be looking at $350,000 in cash or cpf. And out of this amount, 75,000 is required to be paid in cash.

Are you eligible for the loan ?

The next component to consider is if you are eligible to take up the loan for your second property.

For this we will need to refer to the TDSR limits stipulated by MAS.

TDSR limits stipulates that the monthly mortgage, in additional to other recurring loan obligation should not exceed 75% of monthly income.

Consider the case of financing a 1.4 million property with 75% loan. You will be looking at a loan quantum of $1,050,000, this will amount to a monthly mortgage of XXXXXXXX.

Assuming you do not have any other outstanding loan obligation, you will minimally need a monthly income of XXXXX to be eligible for this loan.

To round up this section, it is important to plan ahead before decoupling. Working out what would be a ideal investment property and then considering if you have got sufficient funds to purchase that in the first place.

Checkpoint #6 – Are you ready to shoulder the burden of owning 2 properties ?

While we are caught up with the excitement and exhiliration of owning a second property. It is important to put emotions aside and take a longer term consideration of the responsibility that comes with owning two properties.

There are mainly two aspects that you should think through

  • Lifestyle consideration
  • Career stability

From a lifestyle perspective, it is key to note that investing in a second property is a long term commitment, which will take at least 3 to 5 years for it reap reasonable profit.

During this period, you or your spouse will have to maintain your source of income and will not be able to make alternative plans to stop work and pursue other goals.

Particularly for those planning for a child or a second child, the option of having one person stop work and stay home full time to take care of the children will not be a viable option.

Hence it is important to establish proper alignment between you and your spouse first before pursuing plans of purchasing the second property.

Having said that, we have also come across multiple clients that made use of decoupling to purchase a second property for their family to upgrade into, to facilitate child registration of primary school.

Next, it is also important to consider the stability of your career, as both spouse income will be crucial in supporting mortgage payment for each property.

Checkpoint #7 – Have you considered other options besides decoupling.

While decoupling is one of the most cost efficient way to pursue your goal of purchasing a second property. It will be helpful to consider if there are other options that could be more effective.

Sell one buy two as an alternative to decoupling

There are cases in which selling the current property, unlocking the capital gains and reinvesting into the purchase of two new private property could be a more viable option.

Typically property owners who pursue this strategy are seating on a healthy capital gain and is looking to realise these profits and reinvest into two new property that could provide even greater upside in the future.

Taking an interim step – upgrading and structuring for a 99-1 ownership structure to prepare for future decoupling

For families that felt that they are not in the best financial position to decouple at this point of time, they can consider taking the following interim step.

The couple can consider selling the current property, realising the capital gains and upgrading into another property that can provide a greater upside.

While doing this, the couple can adopt a 99-1 tenancy in common manner of holding to prepare for future decoupling.

As a side note, 99-1 ownership structure is a strategy adopted by property owner to minimise buyer stamp duty incurred during the decoupling process.

Final Word

In conclusion, this round up our 7 point decoupling readiness checklist.

Looking to save time on reading through all this articles on decoupling, send us a text and arrange for a non obligatory consult to clarify all your doubts regarding decoupling and methods to own two properties in Singapore without paying ABSD.

More reads, more gains ?

Kudos on making it this far. The fact that you have invested the last 5 mins reading this article. We believe you are a like minded real estate investor looking to beat the rat race by getting more out of your real estate investment.

If so, do check out the following articles.

Author

  • Jue Wen

    Jue Wen is the content marketing lead. This means he spend his waking hours researching and writing all things real estate. He believes life is a hustle and there is no joy in grinding away daily in our little rat races. He believes making wise moves in real estate investment can be a game changer. Aside from writing all things real estate, you can find him in your nearest bouldering gym.

Looking to purchase your second property?

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Jue Wen

Author

Jue Wen is the property analyst and content marketing lead at decoupling expertise.
He specialises in helping clients overcome the complexities involved in owning their second private property in Singapore.
He had over 10 years of experience in real estate investing and have written over 40 detail guides on decoupling and minimising ABSD. He is a licensed real estate consultant and holds a Bachelor degree in Business Management from the Nanyang Technological University.

Kenji

Co-Author

Kenji is the Group Division Director of ERA Realty Network.
He have got over 20 years of experience in real estate and have successfully helped over 50 couples purchased their second property. He specialises in helping client achieve the best approach towards acquiring their ideal investment properties while minimising ABSD.