There is a lot of momentum in Singapore urging married couples to optimise their property investments with the decoupling strategy. The primary goal is to let couples own more than one private property without incurring Additional Buyer’s Stamp Duty (ABSD) and generate passive income with property rental.
While this might sound like an ideal solution for building wealth, it’s crucial to understand the intricacies of this approach before diving in. If you too are contemplating if decoupling is the strategy for you, read on as this guide will explore how decoupling works, its pros and cons, and factors you must consider before jumping on the bandwagon.
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How Property Decoupling Works
The decoupling strategy is designed to allow each spouse to own and finance one private property independently. Collectively, the couple would own two private properties, effectively not needing to pay the ABSD – a tax imposed on any Singapore citizen or couple buying a second or subsequent residential property.
Paying ABSD is significant in property investment because it is a whopping 20% (as of January 2024). If a couple plans to invest in a second property at S$1 million, they’ll have to fork out an additional S$200,000!
Essentially, decoupling makes property investment a lot more affordable for couples who intend to build wealth over time.
Here are two ways that this strategy could work:
- A couple owns a private property and wants to invest in another:
Decoupling a private property involves transferring full ownership of the existing property to one partner. This frees up the other spouse to purchase another private property under his or her name, thereby avoiding ABSD on the second property. - A couple owns an HDB Flat or Executive Condominium (EC):
Married couples are not allowed to decouple their HDB flat but they can sell their property and use the capital gain to fund the purchase of two private properties. This approach is more straightforward for couples who have completed the Minimum Occupation Period (MOP) for their HDB or EC.
Financial Assessment Before Decoupling
If you are keen to explore the decoupling strategy, conducting a comprehensive financial assessment is a must. Because buying a property is a long-term investment that can directly impact you and your spouse’s financial health for an extended period, a thorough calculation of your affordability can reveal possible risks that you should avoid.
Cash Reserves
First, evaluate your cash reserves. You must have enough cash to fund the 5% down payment for the private property you wish to purchase, legal fees, Buyer’s Stamp Duty (BSD) and other associated costs.
You must also have sufficient reserve to cover for 6 to 12 months’ worth of mortgage payments. This amount will serve as a buffer for unforeseen circumstances, such as job loss or emergencies that might impede your ability to generate regular income.
CPF Ordinary Account (OA) Savings
You and your partner should review your CPF Ordinary Account balances and allocate these funds effectively without depleting them entirely. Set aside a sum of the savings for property investment and reserve another portion as a buffer. This amount can come in handy to pay off mortgage loans in the event of loss income or low cash reserve. You can also use this buffer for retirement planning.
Financing Ability
The most critical part of the financial assessment is evaluating your and your spouse’s ability to finance a property each. This involves assessing your gross monthly income, existing financial commitments, and eligibility under the Total Debt Servicing Ratio (TDSR) framework, which limits monthly debt obligations to 55% of gross income.
Pros and Cons of the Decoupling Strategy
The Pros
Several reasons are fuelling the popularity of the decoupling strategy amongst savvy property investors:
1. Cost-savings
Couples can own two private properties without incurring the additional cost of ABSD. This allows more funds to be allocated towards paying off the properties and reducing mortgage loans.
2. Rental Income
Couples can generate a steady stream of rental income by renting out one property while living in the other. The rental income can offset the mortgage repayment for the rented unit, while the couple sustains the other unit using their income or CPF savings.
3. Low Initial Cash Outlay
The cash outlay for private property investments in Singapore is only 5% of the property price. Couples with existing HDB flat or EC can easily fund the down payment for two private properties when they sell it after the MOP
Let’s assume that a couple sold their BTO HDB flat with a capital gain of S$300,000 after MOP. The sum can be used to fund the downpayment for two properties:
- A one-bedroom condo priced at S$800,000 (5% down payment = S$40,000)
- A two-bedroom condo priced at S$1,500,000 (5% down payment = S$115,000)
- The total cash outlay is S$155,000 and the remaining funds of S$145,000 (S$300,000 – S$155,000) could be set aside as a reserve fund.
4. Stable Asset Class
Singapore’s property market is regarded as one of the safest asset classes for investment. The market’s resilience, even during economic downturns, and the government’s cooling measures ensure long-term sustainability and protection against inflation.
The Cons
As with any form of investment, investing in properties using the decoupling strategy still has its fair share of risks:
1. High Dependency on Dual Incomes
Unless you have large cash savings and don’t need financing to purchase two properties, you and your spouse must maintain stable employment to sustain their respective mortgage repayments. This reduces flexibility for career breaks or early retirement.
2. Stringent Loan Requirements
The many cooling measures implemented by the Singapore government could present hurdles for couples to easily generate wealth from property investment. Each partner must independently qualify for a mortgage loan under the TDSR framework. Existing loans and debts might jeopardise the couple’s chance of acquiring sufficient financing for two properties.
3. Investment Risks
Despite Singapore’s stable property market, couples must be prepared for potential risks such as market downturns, changes in interest rates, or personal financial challenges. New and unexpected cooling measures may also destabilise the outcome you envisioned.
Key Factors to Consider Before Adopting the Decoupling Strategy
While the decoupling strategy offers tremendous opportunity to generate wealth from property investment, this approach requires meticulous planning and considerations to ensure its feasibility.
Here are some factors you should evaluate before embarking on the decoupling journey.
Current Property Status
Your starting point in the property cycle significantly impacts the ease of adopting the decoupling strategy. Couples who own an HDB flat or Executive Condominium (EC) and have reached the Minimum Occupancy Period (MOP) are often in a better position to generate capital gains from the sale of their property to fund the purchase of two private properties.
It’s important to assess if you have enough resources to:
Cover the down payments for two private properties
Maintain sufficient reserve funds for unexpected circumstances
Obtain mortgage loans to finance the purchase
Availability of Reserve Funds
Reserve funds act as a safety net during unforeseen situations, such as job loss and economic downturns. Financial experts recommend maintaining a reserve equivalent to at least six months’ worth of mortgage payments. Without adequate reserves, property investment can become stressful, potentially jeopardising your financial stability.
Individual Financial Capability
Decoupling requires each partner to independently qualify for a mortgage loan hence careful evaluation of the couple’s financial capabilities to sustain their respective mortgages is paramount. Couples should not attempt to overextend financially because it can lead to long-term strain and increase the risk of default.
Legal and Administrative Costs
The decoupling process comes with several additional expenses, including:
- Stamp duties (e.g., Buyer’s Stamp Duty)
- Legal fees for the transfer of property ownership
- Refinancing costs for the remaining partner’s mortgage
These costs could be in the tens of thousands of dollars and should not be overlooked.
Market Timing
Timing is critical when entering the property market. Monitoring property market trends, such as interest rate movements, property prices, and supply-demand dynamics, can help you make informed decisions.
For instance, adopting the decoupling strategy during seasons with favourable interest rates can reduce monthly mortgage payments and make the investment more affordable. Similarly, entering the market when property prices are stable or slightly depressed can offer better value and a higher potential for capital appreciation.
Long-Term Goals
You and your spouse should define your long-term financial and lifestyle goals to ensure you are fully committed to the property investment strategy.
Here are some questions that might help you align your goals:
- Are you interested in generating rental income, capital appreciation, or both?
- How does owning multiple properties fit into your retirement plan or family goals?
- Are you prepared for the ongoing financial commitment and responsibilities of the investment?
Professional Advice
Navigating the decoupling process can be complex. Engaging the help of experienced professionals like property agents, mortgage consultants, and legal advisors can make your investment journey a lot smoother.
These professionals can help you assess the feasibility of your strategy based on your financial situation, identify suitable properties that align with your goals, navigate the legal intricacies of ownership transfers, and avoid costly mistakes by providing informed guidance throughout the process.
Is Property Decoupling Right for You?
The decoupling strategy is not a one-size-fits-all solution. It’s essential to weigh the pros and cons carefully and assess your financial readiness and long-term goals.
Don’t jump into the investment hype until you’ve done your due diligence. When the strategy is well executed, decoupling can be a powerful tool for couples to build wealth through property investments. Conversely, it can lead to financial stress if there is inadequate planning.
If you’re still unsure about whether the decoupling strategy is right for you or have specific questions about your unique situation, don’t hesitate to take the next step:
- Ask a Licensed Real Estate Professional for quick advice.
- Schedule a free 1-on-1 consultation via Zoom to receive personalized guidance on the decoupling process.
Feel Free to Ask Any Questions About Property Decoupling
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