Introduction
Been getting a lot of questions from readers with regards to decoupling and loan related challenges and questions that they encounter during the decoupling process.
In this article, we will seek to clarify all these doubts in writing and also share with you more about the inner workings of what will happen to your current loan when you decouple your property.
Quick intro – Decoupling Expertise
Quick introduction, before you decide to commit the next 5 mins reading this article.
We are decoupling expertise, a team of specialist realtors that specialise in helping Singapore property owners derive the best strategy to purchase their second investment property without ABSD.
While decoupling property is often the go-to strategy that property owners adopt. We pride ourselves for helping our client explore and evaluate other alternatives that best suit individual circumstances and objectives.
Drop us a text to explore the best strategy to minimise ABSD on your next property purchase.
What will happen to your current home loan or mortgage when you decouple your property ?
To set the context, let run through the most common scenario of what will happen to your loan during the decoupling process.
Assumption
- Husband and wife own private property in 50-50% share
- Property is valued at $2.0 mil
- Outstanding mortgage with loan held under both person’s name is $800,000
- Husband is looking to buy over wife’s share
This is what’s going to happen under the hood to your exsting loan during the decoupling process.
Existing loan – $800,000 to be split into 2 portion based on share allocation
- Portion 1 – 50%, $400k = husband’s share
- Portion 2 – 50%, $400k = wife’s share
Buying party to first retain his portion of existing loan / mortgage
Husband being the buying party will first retain his 50% share of the outstanding loan – $400k.
Let’s call this loan component A.
Buying party to fund purchase of share with a new loan component
Husband will then have to fund the buying over of his wife’s share. valued at $1 mil (50% of $2 mil) under the following structure.
- 5% mandatory cash
- 20% cash or cpf
- 75% bank loan
In this process a new loan component comprising 75% of $1 mil, $750k is to be undertaken in addition to husband’s share of current outstanding loan.
Let’s call this loan component B.
Buying party to take up a new enlarged loan
So as part of the decoupling process, the husband will need to take up a new enlarged, restructured loan of …
- Component A + Component B
- $400k + $750k
- Husband will have to take up a new loan of $1.15 mil
Wife will pay up her share of outstanding loan using proceeds
Wife will then receive a total proceeds of $1.0 mil for her 50% share. She will then use it to pay off her outstanding loan, followed by CPF with accrued interest and the rest can be kept as cash proceeds.
- $1.0 mil
- Less $400k, wife’s portion of outstanding loan
- Less CPF with accrued interest
- Remaining to be kept as cash proceeds.
Loan restructuring and loan repricing due to decoupling
So this is also what is known as loan restructuring, in which the original mortgage is being fully redeemed and a new enlarged mortgage is being issued to the new buyer party that owns 100% of the current property.
It is important to note that this is also the party whereby an early loan redemption penalty is being charged by the bank if you conduct this exercise while still being locked in to your current loan.
What is the cost of an early loan redemption penalty
You will be charged 0.75% to 1.5% on your outstanding loan as a penalty.
So if your outstanding loan is $800k, you will have to incur a cost of $12,000.
When will you incur an early loan redemption penalty
When you are still within the 2 or 3 year lock in period for your loan package, which is the most obvious case.
When you have just resigned a loan package, or refinance and the lock in period is renewed.
We highlighted this as we have come across several readers that allow this to slip their mind and refinanced their loan before decoupling.
How do you avoid the early loan redemption penalty when decoupling ?
So the next top of mind question that will follow is that if you are still within the locked in period of your loan, are there any ways to still avoid the early loan redemption penalty ?
A – Take up the new enlarged loan with your existing bank and speak with a banker
So one way would be to dangle the carrot of taking up the new enlarged loan with your current bank and ask if they can provide some leeway to waive this redemption penalty. Given that you will be taking up a bigger loan with them and will be paying more interest.
Decoupling Loan Restructuring and Loan Repricing Assistance
If you need assistance doing that, we can assist you.
We have established a network of competent bankers for all banks in Singapore with experience in helping our readers restructure or reprice their loans.
So if you need assistance simply drop us a text, we can connect you with a banker from your current bank to help you see this through end to end.
B – Take up a loan package with a waival of penalty clause
For those that are due for refinancing, if you plan to decouple in the near future, sign up for a loan package with a full waival of redemption penalty clause.
This is a clause that allows you to waive 50% or 100% of the penalty due to a sale event.
A sale event comprises both a full sale of property or a part sale of share which is decoupling. This will allow you to waive the penalty to be incurred.
Unique questions regarding decoupling and mortgage redemption
Now that we have addressed the more commonly asked questions let’s dive into the less commonly encountered situations.
#1 – If the loan is held entirely under 1 party’s name
Consider the situation when the loan is held solely under one party name.
Eg. Property is own 50-50 or 99-1 by husband and wife.
But the loan is held solely under the husband’s name.
Qn: Do you still need to incur an early loan redemption penalty ?
Assuming the husband intends to buy out wife’s share entirely in cash with no additional loan to be added to the current loan.
Is there still a need to restructure and redeem the loan and incur penalty, given that there is no change to loan quantum ?
Ans : Yes, a loan redemption will still occur even if loan quantum remains unchanged
Even though there is no change in loan quantum, the loan redemption will still have to take place.
Given that the property which is the asset held as collateral is held under both name when loan document is signed, any material change in ownership will require a redemption and redrafting of loan.
In this process, your decoupling lawyer will have to discharge the wife as legal owner of the property.
#2 – if the property is a new launch condo with loan yet to be fully disbursed
This is another situation that often results in queries. Assuming you were to own a new launch condo, that has just TOP.
In this case only 85% of the loan will have been disbursed, the remaining 15% of the loan will only be disbursed upon CSC in another year.
1.5% Early loan redemption penalty will still be applicable on undisbursed loan
Note: Assuming you have got a waival of early loan redemption clause for your loan package. The waival will only be applicable to the 85% of the loan that have been disbursed.
The remaining 15% of the loan that has yet to be disbursed will still be penalised with a 0.75% to 1.5% early loan redemption penalty.
Eg. If the total loan for the new launch condo is $1.0mil, assuming 85% of the loan have been disbursed upon TOP and 15%, $150k has yet to be disbursed.
Assuming you were to decouple the property, a 1.5% penalty, amounting to $2,250 will still be incurred, even if you got a waival in place.
#3 – If the loan is held entirely under 1 party’s name and the party is buying over his spouse’s share instead of selling.
This is another area that could cause potential confusion.
Consider the following situation.
- A property is held 99-1 by husband and wife
- Husband intends to buy over 1% share owned by wife
- And the loan is held solely under his name, with a full waival of early redemption penalty upon sale
Qn : Given the husband is the party looking to buy over his wife’s share and not selling his share, does he still qualify for the waival of early loan redemption due to sale ?
Ans : Yes, the waival for early loan redemption clause will still be applicable irregardless of whether the loan bearer is the selling party or the buying party.
It is valid as long as a sale event occurs, in this case a decoupling is considered a sale event.
Calculate your new loan quantum when decoupling property
If you would like to have an idea of what is the new loan quantum that you would need to shoulder when decoupling, feel free to head over to our decoupling calculator to calculate your cost of decoupling and new loan quantum.
Your turn – decoupling property and early loan redemption penalty
We intend to constantly update this article as we receive more questions from our readers regarding the challenges they faced with their loans when decoupling. Hope this document has been a useful read for you.
If there are any questions regarding decoupling or how to avoid ABSD on your second property do not hesitate to drop us a whatsapp.
Relevant Reads Regarding Decoupling Property
- Is it worth decoupling to buy a second property in Singapore ?
- What happens to your existing home loan during the decoupling process ? – Art of decoupling loan restructuring
