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Decoupling

Many have heard of the term “decoupling” when it comes to property ownership, but may not have a very clear idea of how it works and what’s involved.  We are more in the business of advising on mortgages and strictly speaking decoupling is more the domain of conveyancing law firms who could better advise on the process as it involves the sale and purchase of part-share in the property from one spouse to another, or for that matter any one owner to another. However, I thought it will be good to give a simple introduction to clients who are contemplating that.

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With ABSD (additional buyer’s stamp duty) for a 2ndresidential property purchase surging to 12% since 6 July 2018 even for Singaporeans, we surely see a surge in interest amongst clients coming to us to do de-coupling whilst refinancing their home loans.  And if we add the usual BSD (buyer’s stamp duty) of 4% graduated for residential properties over $1m, a purchaser would already start off with a loss position on day one of owning a 2ndresidential property in Singapore.

Before we talk about decoupling, understand this is not the same as taking out one owner from the mortgage loan which is easily done during refinancing by way of a loan restructuring.  By removing one spouse, say the husband, it frees him up to take on another home loan as his first and only mortgage where the LTV (loan-to-value) limit is 75% (as opposed to 45% for 2ndmortgage and 35% for third mortgage and beyond).  In our industry we call such mortgage structures as 2M1B which means “two mortgagors (or owners) but 1 borrower”. Not all banks allow such structures, but most do.  And in the past banks will only allow that for private properties and not HDB properties, but there are now exceptions.

Still this does not exempt the husband from paying ABSD of 12% as he is still owner of one other residential property in Singapore. This requires decoupling of the property ownership where the wife effectively buys out the 50% stake of the husband in the property after which she would own it 100%.  And that is exactly how decoupling of property is done – just like a purchase.  For this reason, decoupling is sometimes referred to as “part-purchase” (from perspective of the buyer) in the industry.

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The best way to illustrate this is by way of an example.

Case Study

Mr & Mrs Tan, both Singaporeans, are joint owners with equal shares to an existing private condo which they have been staying for years.  As Mr Tan’s income has risen over the years, he is now able to to get a bigger loan to buy a landed property for his family to move into, while they planned to rent out the condo for rental income.

As this is a fictitious case study, we will keep all the figures simple.  We will first look at the financials involved in decoupling and how much cash is needed, before we look at the case for decoupling before making the purchase for the 2ndproperty.

icon - apartments

Condo Valuation = $1.5m

Selling Price = 50% = $750,000

Existing Housing Loan = $700,000

Mr Tan’s CPF used todate (plus accrued interest) = $150,000

Mrs Tan’s CPF used todate (plus accrued interest) = $10,000

Mrs Tan’s CPF Ordinary Account Balance = $250,000

Financials For Seller (Mr Tan)

To sell 50% stake and receive $750,000 as follows:

Loan to be redeemed = $350,000 (also 50%)

Goes back to his CPF = $150,000

Cash proceeds = $250,000

Financials For Buyer (Mrs Tan)

To refinance her own 50% loan of $350,000 to the new bank

(at same time) Buy over 50% stake and pay $750,000 with breakdowns below.

We will look more closely at the buyer side financials as that is crucial to determine if the couple can proceed with the decoupling exercise. How much cash is needed is dependant on how much loan can Mrs Tan secure based on her income, as well as how much balance she has in her CPF.

As her 1st mortgage (part-share value of $750,000), she can get up to a maximum LTV (loan-to-value) of 75%, and she needs to put down 5% cash ($37,500) as deposit and another 20% ($150,000) which can come from cash or CPF. In this example, we will assume that she is good for a loan of only 70% LTV, ie. $525,000 and her CPF balance is sufficient to cover fully the remaining 25% ($187,500) plus the stamp duties and legal fees involved. Hence the cash needed is just the 5% upfront of $37,500.

Loan

Refinanced Housing Loan 1 = $350,000

New Purchase Housing Loan 2 = $525,000 (70% LTV)

Total Housing Loan = $875,000 (maximum loan Mrs Tan can secure)

Equity

5% Initial Deposit (in cash) = $37,500 (5% of $750,000)

Balance payment = $187,500 (25% of $750,000)

Buyer’s stamp duty (BSD) = $17,100 (3% of $750,000 less $5,400)

Legal fee for decoupling & refinancing = $5,500

Total CPF usage = $210,100 ($187,500+$17,100+$5,500)

There is no ABSD for Mrs Tan as this is still her first residential property. Note the legal fee for sale and purchase of part-share is usually in the range of $5,500 to $6,000 as it involves two law firms acting separating for the buyer and seller.

As Mrs Tan has sufficient CPF balance to be used for the part-purchase, she only needs to come up cash upfront of $37,500 for the purchase.

On Completion 

This is what happens on completion of the sale & purchase of the part-share.

New bank will disburse a total of $875,000 as follows:

  • $700,000 to redeem existing bank’s loan in full
  • $150,000 to payback Mr Tan’s CPF
  • $25,000 as sales proceeds to Mr Tan

After settling the loan, Mr Tan will receive his sales proceeds of $250,000 as follows:

  • $37,500 in Cashier’s Order from buyer as initial deposit
  • $187,500 from CPF (released from Mrs Tan account)
  • $25,000 from bank loan

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With decoupling process explained, we will now see if it makes financial sense to do so from the couple’s collective standpoint, which means we will only look at “net cost” to the couple, ignoring items like cash outlay or sales proceeds from the decoupling exercise.

icon - landed property

Landed Property Purchase Price = $2.5m

Option 1: Buying Without Decoupling

As Mr Tan is existing owner of a condo with his wife, as a local he is liable for the ABSD of 12% for 2ndresidential property purchase.  He can however do a restructuring on his condo loan first to free himself up to take on maximum loan of 75% LTV for the purchase.

Buyer’s stamp duty (BSD) = $84,600 (4% of $2.5m less $15,400)

Additional buyer’s stamp duty (ABSD) = $300,000 (12% on purchase price or valuation whichever is higher)

Total costs = $384,600

Option 2: Decouple First Before Purchase

As we have seen in the earlier financials for Mrs Tan,

Buyer’s stamp duty (BSD) = $17,100 (3% of $750,000 less $5,400)

Additional legal fee due to decoupling = $3,500 ($5,500 less usual refinancing legal fee of $2,000)

Total costs = $20,600 (or just 5% of Option 1 costs)

Note here that there could be other costs involved here for decoupling for example ABSD if the spouse who is buying out the part-share is a Singapore PR (5% for 1stproperty), or even SSD (seller’s stamp duty) on the part of the outgoing spouse depending on how long they have been holding on to the subject property.

Even for Singaporean couples, the cost differential is huge and it is no wonder we continue to see increased interest to do decoupling at the same time when one refinances the home loan.  And there is good reason for that – some banks will provide legal subsidy on the “refinanced” portion of the loan.  And there is even one bank providing legal subsidy for the “new purchase” portion of the loan.

Speak to us if you are thinking of refinancing your home loan soon.  And our partner law firm can give you more advice on the decoupling process before you decide.  When you refinance your home loan through us, not only do you enjoy a special rate from our partner law firm for decoupling (below market rate $5,500-$6,000), you also receive a special $150 Refinancing Valuation Fee Offset from us, subject to min loan of $500,000. Other terms and conditions apply. Speak to our consultants today.

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