Decoupling is a uniquely real estate buzzword, just like “sell one, buy two”. Although it’s often bandied about as a way to avoid paying the Additional Buyers Stamp Duty (ABSD) when buying a second property, decoupling isn’t a sure-win.
In fact, there are scenarios where decoupling would cost the buyers even more than the ABSD. Fortunately, most property agents, lawyers, etc. will catch on and warn their clients early. But it’s good to know how decoupling can sometimes cost you more:
First, what is decoupling?
Decoupling is when you sever the joint ownership of a property, so that you can purchase another one as a first-time home buyer. For example, if you and your spouse are co-owners of a condo, you could decouple by buying over all of your spouse’s shares in the property, or vice versa.
Although decoupling also involves refinancing/restructuring the loan to be under one spouse, it’s important to note that this is not the same as restructuring your home loan to remove a co-borrower, something that doesn’t require one of you to buy over the property share of the other.
The main reason to decouple is to avoid the ABSD. At present, ABSD imposes a tax rate of 12% on the second property, for Singapore Citizens (15% for Permanent Residents).
But if your spouse were to fully transfer the property to you (or vice versa), they would no longer officially own a property. This makes it possible for them to purchase a property as if they were a first-time buyer, without incurring ABSD. This allows the non-owner to obtain a higher loan quantum for a property purchase, under the current Loan-to-value (LTV) limits.
Now, let’s talk about how much $$ it takes to decouple.
The main costs of decoupling to note are:
- Conveyancing fees
- Stamp duties
- Prepayment penalties
- Refund to CPF
#1. Conveyancing fees
The conveyancing fees for decoupling range between $5,500 to $6,500. If you’ve involved a mortgage broker in the process, they can usually help you find the cheapest options (the mortgage broker is one of the few things about all this that’s free).
#2. Stamp duties
This is where it gets complicated.
First, the Buyers Stamp Duty (BSD) applies on the share of the property being transferred. We explain how BSD is calculated in this other article. When your spouse buys over your share of the property, or vice versa, they must pay BSD on the share being transferred.
So if your existing property is valued at $1 million, and you have equal ownership (50/50 split), the spouse taking over the existing property would pay BSD on a value of $500,000 (that comes to $9,600 in this case).
Note that stamp duties always apply to the higher of the property price or valuation. So you can’t cheat and try to sell your half for $1; your spouse must at least buy over your half at market value.
Stamp duties may not end with the BSD.
If your spouse is buying over your share and he/she is not a Singapore Citizen and/or already owns another property, you’ll also need to factor in the Additional Buyers Stamp Duty (ABSD). For instance, Permanent Residents pay 5% ABSD even on their first property purchase. So, if your spouse is a PR and buying over your share of the $1 million unit, they would pay an additional $50,000.
If your spouse already owns another property, they would pay 12% ABSD (if they’re Singapore Citizens), or 15% ABSD (for PRs) on the property being transferred. This is $120,000 or $150,000 respectively, to buy over your half of the $1 million property.
Finally, you also need to consider the Sellers Stamp Duty (SSD), if decoupling is done within the first three years of the property purchase. The amount is 12% of the price on the first year, 8% on the second year, and 4% on the third year. There’s no SSD payable after that, so most couples will wait till hold on to a property for at least three full years before decoupling.
#3. Prepayment penalties
Whether this is a factor depends on your home loan package. Most home loans impose prepayment or early redemption penalties, at least in the first three years. This is an added fee for trying to pay off your home loan early.
Unfortunately, when you refinance the loan, you need to pay off the existing loan, and create a new one for your spouse who is taking over the property. Paying off the old loan this way can trigger the prepayment penalty, which is usually 1.5% of the amount being prepaid.
Check the terms and conditions of your home loan. The prepayment penalty usually applies within the first three years (it can be as long as five years for some loans).
#4. Refund to CPF account
As with any kind of property purchase, you must return the amount you used from CPF with accrued interest when you sell the property. It’s important to know this amount, as you could end up with zero cash proceeds.
For example, say you’re obliged to return $170,000 to CPF (check your account online to see how much you owe) after you sell your share of the property to your spouse. However, the proceeds only come to around $160,000. Although you’re not required to top up the $10,000 shortfall if you sold at market value or above, it does mean all the cash is going back into your CPF.
Remember that, to buy your next property, you will need to pay at least 5% of the price in cash. That might not be possible if your funds get all locked up in your CPF account. So, careful financial planning is necessary before decoupling.
The costs of decoupling means you can end up paying more than just the ABSD. Here’s an example:
Let’s say you and your spouse both currently own a condo with a value of $1.5 million. You have just bough this condo 18 months ago, and still owe about $1.4 million. You now consider decoupling, so that one of you can single-handedly buy a second, smaller condo at $1 million (perhaps to rent out for income).
If you were to just pay the 12% ABSD on the second condo, you would incur a stamp duty of $120,000.
But you decide to decouple instead. Your spouse is a PR, while you’re a Singapore Citizen; and she’s the one who will be buying over your share.
Your current condo is worth $1.5 million, so her part-purchase is $750,000. The costs are:
- BSD of $17,100
- ABSD of $37,500 (because she’s a PR)
- SSD of $60,000
- Prepayment penalty (1.5 per cent of approx. $1.4 million) of $21,000
- Conveyancing fees of $6,000
- Misc. costs such as valuations, processing fees, and so forth, totalling $1,000
The total cost of decoupling is $142,600, or about $22,600 more than just paying the ABSD.
No single one of the above factors will make decoupling more expensive than the ABSD, but taken together, they just might. If one or more of the points below apply to you, then decoupling to buy a second property might not be the cheapest option for you:
- You or your spouse are not Singapore Citizens and will incur ABSD in the process of decoupling
- The person buying over your share already owns a property, and will incur ABSD in the process of decoupling
- When the second property you intend to buy is much cheaper than your existing property (e.g. you own a $2.2 million condo, and want to buy an additional $800,000 compact unit), decoupling might be more costly.
- You are within the SSD period (almost always a losing proposition to decouple at this point)
- You would incur steep prepayment penalties on your home loan
Finally, refunding your CPF is not really a “cost” per se. But do make sure you’ll have cash left for the downpayment of the next property, after the proceeds go into CPF.
The lesson? Before you decide to decouple, consult a real estate agent or qualified financial advisor to work our your finances and options.
Would you consider decoupling to finance a second property? Let us know in the comments below!
If you found this article helpful, check out Negative Sale: How selling your HDB/condo could put you in instant debt and 5 ways selling your property can go horribly wrong (and how to fix it)
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