I am a Real Estate Professional since 1995. Helping a lot of people to build their wealth through property investment. Property investment is not only talking about buying and selling. It needs to have a strategically planning according to an individual profile.
Every case is unique, I have to understand each individual before I can come up with a road map for my client.
Recently, the term "decoupling" has been going around in the Private Residential Property sectors.
Many property agents have been giving advice to buyers to decouple their existing joint purchase property to free up the other person to avoid the ABSD for 2nd properties. Why is this happening?
It all arises due to the cooling measures by the government. Especially the last cooling measures take effect on 6th July 2018. The ABSD for a 2nd property increased to 12% compared to the 7% before the adjustment to Singapore Citizens.
So, What is "decoupling"?
I believe many people do not understand how the decoupling process works, how long is the process and what are the costs involved.
The term "decoupling" in a real estate context refers to the property jointly owned by a couple, freeing up one person going through a particular process and the other person to take full ownership of the property.
The whole process involved two property transactions process. One is the selling process, and the other is the buying process on the same property.
The following example will explain the "decoupling" process.
Mr and Mrs Tan jointly owned private residential property. They decided to do a "decoupling" to this property to remove Mrs Tan from the ownership of the current property. After freeing Mrs Tan from the existing property, she will be able to buy another property without paying full ABSD since she does not own any property.
The process will go as follows,
In the Selling process, Mrs Tan
The current property is owned by Mr and Mrs Tan, under the joint tenancy scheme. Mrs Tan will be selling her share of the property to Mr Tan. Since it is under joint tenancy, by default, Mr.s Tan owns 50% of the share.
To ascertain the current property's value, Mr and Mrs Tan will have to get a valuer to value the property.
The value of the property determined by the valuer will be the price for Mrs Tan to sell her share to Mr Tan. Should the property be purchased lesser than three years, Mrs Tan would be liable for SSD (Seller Stamp Duty).
The Purchasing Processes, Mr Tan
Mr Tan will be purchasing the 50% share from Mrs Tan. He needs to pay the Normal buyer stamp duty for the value of the share.
The whole process takes around eight weeks to complete.
They have to engage a lawyer to manage these two transactions.
What are some of the costs involved in decoupling?
Below are the basic costs involved in Property Decoupling
1. The lawyer fees.
2. The valuation fees
3. Bank administration fees (if early termination of mortgage loan contract)
4. Stamp Duty
5. Seller stamp duty (If property purchase is less than three years)
Decoupling - Is it beneficial to you to purchase your next property?
The only reason for decoupling is to free up one person from a joint ownership property, so as to avoid paying ABSD.
But is Decoupling really benefit you?
In simple, you might not be benefiting from buying the second property after decoupling. The reason is that there are too many areas to look into it. Do not dive into the process because you heard from someone that this allows you to avoid ABSD when purchasing a second property.
Let me share some of the possible scenarios.
Case Study 1 ( Positive )
Mary and Paul are a married couple and jointly own a three-bedroom private property. Both of them are Singaporean, 35 years old, and have a salary of S$7,500 and S$10,500, respectively. They have owned this property for more than four years and have an outstanding mortgage loan of S$1M. the value of the property is now worth S$1.8M.
They intend to decouple the current property to free up Mary to purchase another property worth S$1M in Mary's name to avoid paying the ABSD.
Is it worth decoupling from the current property to buy a smaller unit for investment?
In the purchase of the 2nd property, if Paul and Mary decide to hold on to the joint ownership of the current property, they have to pay an ABSD of 12%, which comes up to be S$120,000, for a property value worth S$1M.
Let's check whether will decoupling benefit both Paul and Mary.
The value of the current property is S$1,800,000, and their existing outstanding loan is S$1,000,000
Mary will be the one selling her share to Paul to free herself from this property.
From the above calculation, Paul and Mary will save some money from decoupling. Mary can therefore go ahead and purchase another property under her sole name.
What happens after decoupling?
Once Paul and Mary decouple their property, Paul will be servicing the loan himself.
The current property is valued at S$1.8M. By default, Paul's mortgage loan can take up to 75% of the value (first residential mortgage Loan) which will come up to S$1.35M.
The existing loan balance is S$1M, which means Paul will now restructure the mortgage to S$1.35M.
Paul has a monthly fixed income of S$10,500. He will be able to services a loan up to S$1.403M, For S$1.35M, he can easily get approval for the mortgage loan from the bank. With a mortgage loan of S$1.35M, at an interest rate of 2% per annual, his monthly instalment is around S$4,990 for a 30 years tenure.
As for Mary, she can purchase a property worth S$1M as planned provided that they have a fund of estimated S$290K upfront.
The decoupling of the property gives them an estimate of (S$120,000 – S$45,695) = S$74,305 saving.
Case Study 2 (negative)
Lisa and John are a married couple and jointly own a three-bedroom private property. John is a Singapore Permanent Resident, and Lisa is a Singaporean.
Both are 35 years old and have a salary of S$10,500 and S$7,500, respectively. They have owned this property for only two years and have an outstanding mortgage loan of S$1.4M. the value of the property is now worth S$2M.
Property agents have been asking them to decouple the property so be able to buy another lower quantum unit for investment. Will they benefit from the decoupling of their property?
Let's do a financial calculation for them.
Lisa and John intend to "decouple" their current joint ownership property to purchase a smaller unit worth S$1M for investment.
It will be their 2nd property if they never "decouple" their current property. That will be an ABSD of 15% (don't forget John is a Singapore Permanent Resident), coming up to be S$150,000.
John will be buying over the share of the current property from Lisa in order to free Lisa from the ownership of the current property.
John needs to pay an ABSD of 5% (first Residencial property) since he is a Singapore Permanent Resident
The current property is being valued at S$2M. By default, Paul's mortgage loan can take up to 75% of the value (first residential mortgage Loan) which will come up to S$1.5M.
The existing loan balance is S$1M, which means Paul will now restructure the mortgage to S$1.5M.
Paul has a monthly fixed income of S$10,500. He will be able to services a maximum loan of up to S$1.403M. Now the loan amount increase to S$1.5M, where John can only have a maximum loan of S1.403M he will need to pay a difference of S$97,000 upfront.
Where a mortgage loan of S1.403M at an interest rate of 2% per annual, his monthly instalment is around S$5,186 for a 30 years tenure.
For Lisa, if she purchases a property worth S$1M as planned provided that they have a fund of estimated S$290K upfront.
From the above calculation, Lisa and John will be able to save them an estimate of (S$150,000 – S$144,695) = S$5,305 from the decoupling of the property.
Taking into account the upfront funds that both of them have to come out with, Lisa and John do not really benefit from the decoupling during the current market.
Although I have advised a few of my clients on how decoupling can benefit them, I can not use the same approach, duplicate it across all my clients. Decoupling is unique to every single case.
1. Not all decoupling will benefit you, you need to understand your own situation.
2. Every decoupling case is unique, no similar approach can be duplicated across all cases.
3. You must have a plan after your decoupling.
Should you want to look into using decoupling to benefit from buying an investment property, I will be most keen to share with you what options you have.
After understanding your current property situation and moving ahead, what is your plan? Minimally, the next 3 years.
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About The Author
Peter Tan Choon Guan
The Real Estate Guy.
Associate District Director and Project IC at Huttons Asia Pte Ltd
Since 1995, he has been providing professional consulting services to clients in Singapore and beyond. From strategic planning to innovative solutions, his focus is always on building an efficient and results-driven relationship.
He will work with you to create a customized plan of action for yourself or your organization. Peter is an adventurous person, he is a basketball player since school times, representing schools and organizations in the National Tournament.
He is also active in track and field, participated in school events and national events and got a bronze medal for his Long Jump events and a silver medal in his 100M run.
Water sports in another area he is interested, in obtained a few medals for his canoeing competition. He conquered Mount Kinabalu in East Malaysia, Mount Tahan and Mount Ophir in East Malaysia.
He is enlisted into National Services as Naval personnel, a Section IC in his department. Appointed to Acting Platoon Sergeant during his Reservist.
During school times, he is a class monitor and a school prefect during his primary school time. Become a youth leader in a later stage. All the exposal created him a leader by nature, able to train and guide people.