The risk of decoupling property – Should you do it ?

risk of decoupling property

Table of Contents

Introduction

Based on our recent Decoupling Property Sentiment Survey. We have noticed Singaporean property owners showing a heightened interest and awareness towards decoupling property and owning a second property.

While we are keen advocates for property decoupling, we recognize that it comes with some risk. And these risks need to be well accounted for at the planning stage.

The focus of this article

In this article, we will highlight the 5 key risk associated with decoupling and share solutions to mitigate this risk.

We hope this article fills the knowledge gap currently not addressed by content available on Google. Many of the existing articles focus mainly on the benefits of decoupling but not the risk involved with it.

A little bit about ourselves

This could be the first time you are reading an article on Decoupling Expertise, allow us to quickly introduce ourselves.

We are a team of specialist realtors that specialise in decoupling property in Singapore.

Having experienced the pain of finding the optimal way to avoid paying ABSD when purchasing our second properties. We decided to build an entire service suite targeted at helping savvy homeowners devise the best approach towards purchasing their 2nd property.

Drop us a message if you like get a second opinion to re-affirm your plans for decoupling property.

What is decoupling ?

For the benefit of those that are not acquainted with decoupling.

Decoupling property is a method that savvy property owners adopt to purchase their second property without ABSD.

It works via an internal buy and sell transaction between co-owners, with one party buying over the shares of the other party.

In the process, freeing up one party’s name to purchase the second property without ABSD.

For a deeper dive into the topic of decoupling property and the cost of decoupling, refer to the article inline.

The risk associated with decoupling property

With the introduction out of the way let’s touch on the 5 key risk associated with decoupling property.

1 – Overstretching your mortgage

While it is important to strive and make money from property, you do not want to live hand to mouth monthly, struggling to pay up your mortgages.

From our experience, consulting multiple clients, the initial excitement of being able to own a second condo often led to a compromise in financial prudence.

We need to be mindful of two set of mortgages when executing decoupling to purchase the 2nd property.

The first litmus test to clear is to consider if you or your spouse is able to comfortably take over the full mortgage of your current property.

Ability for one party to take over the new restructured loan on current property.

What happen during the decoupling process is that as one party buys over the share of the leaving party. He or she has to take up a new enlarged loan that comprises of the following two component.

  • Value of his or her own share of the existing outstanding mortgage
  • Value of a loan to finance 75% of the share value to be bought over

Using a private condo valued at $2.0 mil, with a total outstanding loan of $800,000 dollar, held under a 50-50 joint ownership.

The party buying over the other party’s share will have to take up the a loan comprising of the following component

  • His current share of outstanding mortgage – 50% x $800,000 = $400,000
  • New loan to finance the purchase of his spouse share – 75% * $1.0 mil = $750,000
  • Total new restructured loan = $400,000 + $750,000 = $1.15 mil

As a side note feel free to use our decoupling calculator to easily calculate your restructured loan size after decoupling.

To ensure over leveraging, you will need to ensure that you or your spouse can comfortably afford the monthly mortgage of $4,848.

Netting off a $1,000 CPF, you are looking at a $3,848 cash contribution monthly

Note this is calculated with assumption of a 30 year tenure and a 2.9% interest rate.

Ever wondered what is the difference between joint tenancy vs tenancy in common, check out article in line on how choosing a different manner of holding can help you in the decoupling journey.

Ability for other party to comfortably afford the mortgage of the second property

Similarly for the party has free up his or her name to purchase the second property. He will have to be comfortable shouldering the mortgage for the second property.

Assuming a 2nd investment property valued at $1.5 mil, you will be looking at a max 75% loan valued at $1,125,000. This will amount of a interest of $4,743 per month.

Here are some solutions you can consider to mitigate the risk associated with mortgage.

Reduce the outstanding mortgage for your current property

The first solution you consider is to give yourself more time before you decouple your property. If the mortgage for the existing property is an issue, take the time to pay down the mortgage first.

Time also permits opportunity for your earning abilities to change, assuming you and your spouse were to progress in your careers, your ability to service your loan will improve overtime.

Pay attention to interest rate cycle

Your monthly mortgage payment is highly influenced by the prevailing interest rate. Ideally you should execute your property decoupling plan in a low interest rate environment. This will ensure you pay less interest expense per month.

Consider other options

Besides decoupling there are many more strategies to make money from real estate. If after doing your sums, you simply cannot afford to decouple, then don’t do it.

There’s more to life than making money.

You could potentially consider the following interim step.

Selling your current property and upgrading to another property that has higher potential for capital appreciation. And still keep your plans of decoupling alive by structuring the ownership of the new property purchasing in a 99-1 tenancy in common structure and then adopting the decoupling 99-1 strategy some time down wht road.

As a side note if you are interested in which condo is good for investment in Singapore check out the article link in line.

2 – Selecting a sub optimal second property due to budget constraint

The whole point of decoupling is to purchase a second investment property with good capital gain potential.

Working hard to get the decoupling process and financial equation right is only half the work done. Researching and selecting the right investment property is a tall task by itself.

We have seen investors stopping short at this part ending up with properties that did not perform up to mark.

The solution to mitigate this risk

We figured the best way to mitigate this risk is to adopt a very structured approach towards your property research.

One trick is to avoid viewing the property before you do your research. This is to prevent your emotions from taking over, we have seen many buyers reversing the process, finding a property they like and then building the logical to purchase it.

Understand where the demand is coming from ?

The first step to doing this is to understand where is the demand coming from, who the buyers are and what are they buying it for.

With that you will then have an idea of what area to purchase your property in, and what size of unit should you purchase. Refer to article on best condo size for investment property in Singapore for more insights.

As a quick overview, the impact of the new 2023 ABSD has altered the source of demand. Current demand is skewed towards local Singaporean families purchasing for their own stay.

Choosing properties with attributes that appeal to your exit audience

With that in mind, you should be looking out for larger 3 bedroom units, that is located within 1km of reputable schools with affordable price quantum.

We discuss a lot more about investment property selection in our other articles, reference the following articles for more insights.

3 – Retaining the wrong property

The crux of decoupling is that you get to keep your current property and purchase a second property. But many owners missed out on the consideration if their current property is even worth retaining.

Putting lifestyle and family homestay criteria aside for the moment. You should assess if your current property faces the following challenges.

Decaying lease – is your current property greater than 20 years old

Present of price catalyst – are there any upcoming trigger that can trigger another round of price increase for your property ? Eg. District development, transportation line upgrade, new condo launches in your area.

Has its price been plateauing ?

If your property show signs of the above pointers, then you should consider if you should utilise the sell one buy two approach instead of decoupling.

4 – Not ready negative cash proceeds due to CPF refund

This happen quite often to owners that utilise a 99-1 tenancy in common structure for their property purchase. If the party that holds the 1% share infuse a significant amount of CPF into the property.

The challenge of a negative cash proceed will arise when the 99% shareholder attempt to buy over the 1% share holder’s share. This is also known as decoupling 99-1, we have covered it extensively in the article link inline.

When decoupling, the seller holding 1% share is suppose to refund his or her CPF contribution and accrued interest for the property back into his CPF OA account.

Assuming the value of property is $2.0 mil, a 1% share equates to a cash proceed of $20,000. But if the selling party have previously utilise $100,000 worth of CPF and accrued interest, there will be a shortfall of $80,000 cash required for CPF refund.

This often create a setback in budget for our property owners

Minimize CPF usage for 1% shareholder

Aside from saving up more cash to cater for this shortfall. The only solution for this is for the 1% share holder to minimize his or her CPF usage from the onset.

Check out the 9 common pitfalls to avoid when decoupling tor more insights on issues like this.

5 – Misplanning your timeline

Referring to the general timeline of decoupling. It takes 7 days to get your sale and purchase document signed, at this point you are free to purchase a second property without ABSD.

But it takes at least 12 weeks for your cash proceed to flow back into your bank account and additional 2 weeks, a total of 14 weeks for CPF to flow back into your OA account.

Hence, when purchasing our second property we need to time the completion of our purchase after all our funds have flow back into both our bank and CPF OA account.

If not managed properly, it could result in a shortage of fund to complete the purchase, resulting in a forfeit of the option fee.

If you need advise on managing your decoupling timeline drop us a text

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.