The common questions that arise about existing home loan during the decoupling process
Within the broader context of decoupling a property, there are several components that need to be addressed in order to successfully achieve the end goal of purchasing a second property without ABSD.
These typically include:
- Legal administration of the decoupling process
- Financial calculation and planning
- Loan restructuring
- Second property research and selection
Specific to the loan restructuring component, it often remains a black box and results in many questions arising from property owners pertaining to what actually happens to their existing home loan during the restructuring process.
This sets the context for this article. The goal is to list out and address all questions with regards to the inner workings of the loan component during the decoupling process.
We are Decoupling Expertise
Before committing the next 5 mins reading this article, it helps to know who is behind the pen.
We are Decoupling Expertise, a specialist real estate investment consultancy. We specialise in helping Singaporean property owners procure 2nd Investment Property.
Our key value add comes in 3 area
Tax optimisation strategies
We work with investors to determine the optimal ownership structure and strategy to procure the second property without ABSD.
Decoupling property, Transferring of ownership to spouse, Restructured ownership under individual names, Purchasing under child’s name and Procurement via Trust, all falls within our daily toolset. Together with our network of legal partners, we will take the optimised procurement strategy from inception to completion.
Financial calculation and Loan Restructuring
Unlike a single property purchase, there is an added layer of complexity toward financing a second property. To address that, our team adopts a number-first culture which we embark on rigorous financial modelling to help our churn project the cost of decoupling and related strategies, and project budget available for the second property. As part of implementation, we work directly with major banks in Singapore to restructure your loans to cater for a dual property portfolio.
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Analyst by trait, and practioner by experience, running our own dual property portfolio. Our research and articles are grounded on helping 2nd property investors procure the right investment property. To achieve that, our research is soley focused on the investment attribute of a property and on unit types that fits the budget of a 2nd property investor.
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What will happen to my current home loan when decoupling my property?
When decoupling a property, the bank treats it as a change of ownership in the property — from a property jointly owned by 2 spouses to one that is solely owned by the staying party.
The existing home loan would then have to be restructured to one that is borne solely by the spouse that will become the sole owner of the property after decoupling.
There will then be a need to re-assess loan quantum eligibility based on the sole owner’s monthly income against the stipulated TDSR limits. For ease of reference, the current TDSR limits stipulate that monthly recurring loan payments must not exceed 55% of the owner’s monthly income.
As a consequence of loan restructuring, the existing loan quantum may change. We will elaborate further in the section that follows.
Will my current outstanding loan quantum remain the same after decoupling?
No, the current outstanding loan quantum will not remain the same in most cases after decoupling, as it will be adjusted as part of the loan restructuring process. In many scenarios, the existing outstanding home loan quantum will actually be enlarged because additional leverage is taken to finance the purchase of the outgoing spouse’s share.
Expansion to current outstanding loan quantum after decoupling
In most cases, the current outstanding loan quantum will increase, as the spouse taking over sole ownership of the property uses the opportunity to expand the loan quantum to finance the purchase of the other spouse’s share. The new expanded loan quantum will typically comprise the following components:
- The previous outstanding loan; plus
- Any additional amount needed to finance the “buy over” of the spouse’s share, valued at market value.
This expanded loan amount is then subject to two key thresholds set out under current MAS housing loan rules for a borrower who still meets the standard criteria:
- The total loan taken on the property must not exceed 75% of the market value of the property (the loan-to-value limit for a first housing loan, assuming other conditions are met).
- There is a minimum requirement to fund the purchase of the spouse’s share with 25% cash or CPF funds, of which at least 5% must be paid in pure cash.
Case example of expansion to current outstanding loan after decoupling
Assuming a property which is valued at $2 million in the market at the time of decoupling. It is held under a 50–50 joint tenancy share structure. 50% of the $2 million share to be transferred will be valued at $1 million, and there is a $1 million outstanding loan on the property.
The easier mental model to understand how the loan can be expanded while adhering to the 2 MAS thresholds stated above will be the following:
1.For the $1 million outstanding loan, assuming 50% ($500k) will be retained by the “staying” spouse who is buying over the share and 50% ($500k) will be retained by the “leaving” spouse, the spouse selling the share.
Now, on to the segment where the staying spouse will fund the purchase of the leaving spouse’s share:
- a) 25% has to be funded by cash or CPF, with a minimum 5% in pure cash
- b) 75% can be funded by bank loan
2.The incremental bank loan that can be taken up to fund the share purchase would then be $750k (75% of $1 million). The new expanded loan that can be taken up by the “staying” spouse would then be:
- $500k – existing loan retained
- $750k – new incremental loan taken to purchase the share
This totals up to $1.25 million. Reconciling this with the two previously established thresholds: firstly, it falls within the maximum 75% LTV of a $2 million property, capped at $1.5 million. Secondly, it meets the criteria of funding the share purchase with a minimum 25% cash or CPF equity input.
When current outstanding loan decreases after decoupling
In uncommon cases, the current outstanding loan on the property can actually decrease after decoupling. This tends to happen under two specific circumstances.
- Not by choice: the sole owner or remaining spouse’s monthly income is not eligible to take on the existing outstanding loan by herself under the TDSR framework, which then necessitates paying down part of the existing loan in order to meet the minimum TDSR threshold.
- By choice: for financial planning reasons, some couples may intentionally decide to reduce the amount of mortgage taken on the homestay property and focus more leverage on the second property instead. In such cases, they may choose to pay down and reduce the original outstanding loan during the decoupling process.
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What happens to the “leaving” spouse?
The spouse that is selling shares, or “leaving”, will receive the market value of his share as the sale consideration. Using the example of selling a 50% ($1 million) share in a property valued at $2 million, the leaving spouse will receive $1 million in sale proceeds funded by the staying spouse’s new loan, cash, and/or CPF.
From this $1 million sale consideration, part of it must first go towards redeeming his portion of the outstanding loan on the current property. Referencing the earlier example of a $1 million total outstanding loan, he will have to pay the bank back $500k in cash to account for his 50% share of the $1 million outstanding loan.
After which, he would need to account for the CPF refund on the CPF he has utilised together with the accrued interest. Under CPF rules, any CPF OA funds used for the property, plus the accrued interest (currently 2.5% per annum), must be refunded back into his CPF account when he sells his share. Assuming he utilised $200k worth of CPF including accrued interest, the cash proceeds he ultimately takes out will be:
- Sale consideration: $1,000,000
- Less redemption of outstanding loan: $500,000
- Less CPF refund (including accrued interest): $200,000
Nett cash consideration: $300,000.
| Description | Description | Amount (S$) |
| Property value | Market valuation of property | 2,000,000 |
| Ownership share sold | 50% share sold by leaving spouse | 1,000,000 |
| Sale consideration | Amount received from staying spouse for 50% share | 1,000,000 |
| Less: Redemption of outstanding loan | Leaving spouse repays their share (50%) of the existing $1M loan | -500,000 |
| Less: CPF refund (including accrued interest) | Refund to CPF OA for funds previously used plus accrued interest | -200,000 |
| Net cash proceeds | Cash the leaving spouse ultimately receives | 300,000 |
Should I max out the loan during the decoupling process?
The following needs to be considered when deciding if you should max out your loan during the decoupling process.
1.How stable is the sole owner’s monthly income
A downside of over-leveraging on the existing property when the sole owner’s income is unstable is that it can lead to issues in maintaining the monthly mortgage of the property. If income drops, it may also create issues when looking to refinance the loan later, as the maximum loan quantum eligibility will fall in line with a lower assessed income under TDSR. Couples should therefore seek to maintain a reasonable and prudent loan quantum on the existing property if the staying spouse’s monthly income is expected to experience volatility.
2.Budget and size of the target 2nd property to be purchased
Assuming the sole owner’s income permits, couples can consider maximising the loan quantum on the current property to free up more cash capital on hand to purchase a better-positioned second property that is optimised for capital appreciation. This could, for example, allow a stretch in budget from a 2-bedroom unit to a 3-bedroom unit, or from a fringe project to one with stronger demand drivers. The key is to balance higher leverage with comfort in servicing both mortgages over the long term.
3.The prevailing interest rate
The prevailing interest rate affects both the monthly instalment and the accumulated interest expense that will be incurred in financing the initiative to decouple and own 2 properties. A general rule of thumb is to minimise your overall loan quantum in a high interest rate environment to reduce interest costs, and to be more open to maximising your loan quantum in a low interest rate environment where borrowing costs are cheaper.
What happens when staying spouse income decreases when a restructured loan is due for refinancing?
The outcome can be two-fold when the staying spouse’s income decreases by the time the restructured loan is due for refinancing.
- The staying spouse may not be able to refinance to a new loan at the same quantum and will be forced to stick with the current loan package, enduring a higher fixed or floating rate after the lock-in period ends if no bank is prepared to offer a similar-sized replacement loan under TDSR.
- The staying spouse may still be able to refinance, but only at a lower loan quantum that he or she is eligible for based on the reduced monthly income. This will then require additional cash or CPF capital to pay down part of the existing loan so that the new refinanced quantum fits within the updated TDSR limits.
Will the restructured loan be using the same mortgage rate as the previous outstanding loan?
No, given that the loan is restructured, the previous mortgage rates cannot be retained. Once ownership changes and the facility is restructured, it is treated as a fresh loan, and a new loan package will have to be selected at the prevailing interest rate offered by the bank at that point in time
How is capital gain unlocked when restructuring or refinancing my loan during the decoupling process?
Capital gain from your current property is unlocked when the “leaving” spouse’s share is sold to you at market value during the decoupling process. Your spouse will then receive the sale consideration for his share in the property at today’s market value, which is typically higher than the original purchase cost, thereby realising a profit on his portion.
In this sense, the leaving spouse, by selling his part-share to you, has effectively reaped the spread between his cost of purchase and the market value of his part-share.
Diving deeper into how the purchase of his part-share is financed, via a combination of your cash/CPF and a new bank loan that is added onto your existing outstanding loan.
The net capital gain unlocked and received by your spouse is, in large part, funded by the bank through this enlarged loan quantum on the existing property.
Example of how capital gain is unlocked during the decoupling loan restructuring process
Assume this simple case:
- You and your spouse bought a condo for 1.2 mil.
- Today, it is worth 2.0 mil.
- Each of you owns 50%, so your spouse’s share is now worth 1.0 mil.
During decoupling:
- You buy your spouse’s 50% share at 1.0 mil (market value).
- You pay this 1.0 mil using a mix of cash/CPF + a bigger home loan under your sole name.
- Your spouse receives 1.0 mil sale proceeds, even though “his half” originally cost only about 600k when both of you bought the property.
The difference between his original cost (say 600k) and the 1.0 mil he now receives is his capital gain, and much of that gain is effectively funded by the bank because your new, enlarged mortgage is what makes it possible for you to pay him 1.0 mil in cash/CPF.
What are the potential cost that you may faced when restructuring your loan when decoupling ?
Early redemption / prepayment penalty
If your existing loan is still in its lock-in period and needs to be redeemed or substantially reduced to facilitate the restructuring, the bank may charge an early redemption or prepayment penalty, often in the range of about 1.5% of the redeemed outstanding loan amount.
Refinancing / repricing fees
If you refinance to a new bank as part of the restructuring, you can expect legal and valuation fees, typically amounting to a $1,800 for legal fee, $600 for valuation fee, before any subsidies. In contrast, repricing within the same bank usually involves only an admin fee, but may not always offer the most competitive interest rates available in the market.
