Property Jargon of the Day: Decoupling
Every day, 99.co takes a piece of property jargon and demystifies it. Today, we’ll look into a word that you keep hearing at property seminars or from agents: decoupling
What is decoupling?
Decoupling is when one of two co-owners of a house transfers all their shares to the other, thus surrendering ownership completely.
This can happen for a number of reasons, such as divorce. But there’s another sneaky use for it: avoiding the ABSD. Remember, when buying your second property, you’re subject to a tax of 12 per cent (or even higher if you’re not a Singapore citizen). This is the main deterrent to an investment property.
But if you fully transfer your ownership of your house to, say, your spouse, you no longer own a property. As such, the next house you buy isn’t subject to ABSD.
It’s not just about ABSD, it also impacts your maximum loan and CPF usage
When you have an outstanding home loan, your maximum LTV for a bank loan is 45 per cent of the property price or value (whichever is lower). By decoupling, you could get the usual maximum LTV of 75 per cent when buying your next property.
Then there’s the issue of the CPF. If you already own a house, you need to have enough in your CPF to meet the basic retirement sum, before you can use any excess monies to for another property. You can check your basic retirement sum on the CPF website. As most buyers use their CPF for the down payment and the monthly home loans, they’ll want to decouple so they can access as much of heir CPF Ordinary Account (CPF OA) as possible.
But it’s not as simple as “just transferring” your share
Important conditions to watch for include:
- Whether the property is an HDB flat
- The outstanding mortgage
- Return of CPF monies used
- SSD and BSD are still payable
- Legal fees still apply
- Potential for legal complications later
1. Whether the property is an HDB flat
You can’t decouple if the shared property in question is an HDB flat. As of April 2016, HDB only allows decoupling for reasons of death, divorce, marriage, or one partner losing Singapore citizenship.
Decoupling for HDB flats is sometimes allowed for other situations, such as financial emergencies or terminal illness. These cases are reviewed individually (we can guarantee that “I want to buy a second house” won’t be an acceptable reason).
So for the most part, decoupling can only happen if the owned house is private property.
2. The outstanding mortgage
Once decoupling is complete, the person taking over the (formerly) shared property will have to bear the full mortgage alone. Note that this can cause problems later, such as with refinancing.
For example, the TDSR requires that a borrower’s total monthly repayment be 60 per cent of their monthly income or below. It’s possible for two co-borrowers to meet this TDSR requirement; but if one leaves, the income of the remaining borrower may not fall under this limit. This can make it difficult to refinance the loan later.
Also, there’s the simple fact that shouldering a mortgage alone can be tough on one partner.
3. Return of CPF monies used
When you transfer your share of the property to the other co-borrower, you also need to return any CPF monies you’ve used for you house. This is typically the CPF used for the down payment, as well as for any home loan repayments. The amount returned is inclusive of the 2.5 per cent interest that you would have earned.
You can still use your CPF monies for the next house you buy of course; just be aware that you need sufficient cash to put back into your CPF.
4. SSD and BSD are still payable
If you transfer your shares of the property within the first four years, you’re still required to pay the Sellers Stamp Duty (SSD).
In addition, remember that the transfer of ownership still counts as a transaction. The co-owner who receives the entirety of the property must pay the Buyers Stamp Duty (BSD).
Note that you cannot artificially lower the BSD by putting a $1 price on the property, as some misinformed people have claimed. BSD is based on the higher of the property price or valuation.
5. Legal fees still apply
The exact fees will depend on how complex your situation is, and which law firm you go to. Regardless, you should expect to pay legal fees that are upward of $5,500, all costs factored. You should shop around with different law firms, to see which one is cheaper.
6. Potential for legal complications later
It should go without saying, but remember that you’re giving the entire house to the other co-owner. This can sometimes result in sticky issues. For example, if there’s a big fight and they decide they want to kick you out, well…it’s their house now, you haven’t got any rights to it.
Also, there’s the thorny issue of divorce. If you’ve actually been servicing the entire loan, and your co-owner is a borrower on paper only, you’ve effectively paid for the whole house up to the point of decoupling. But the law won’t see that, when the paperwork shows both co-borrowers are paying their share.
In such a situation, will you be okay with having to split the proceeds, if the house gets sold? That’s kind of a big loss to you, if you actually paid the bulk of it.
Decoupling doesn’t always make financial sense.
Always check if the cost and ramifications of decoupling are justified. Sometimes, it might be better just to pay the ABSD and be done with it. Speak to a qualified realtor, if you need some advice.
What bit of property jargon confuses you? Voice your thoughts in our comments section or on our Facebook community page.
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