We Make $270k Per Year And Are Upgrading To An EC. How Should We Structure It To Decouple & Buy A Second Property In The Future?
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Stacked
- May 19, 2023
- 11 min read
11 min read
Dear Stacked Homes,
My wife and I have enjoyed reading the valuable insights and market analysis which you have provided to other buyers/sellers and finally our time has come.
We are in the midst of selling our current HDB and buying a resale EC. My wife and I have heard a lot of “decoupling” and how couples made use of this strategy to own an additional investment property without having to pay for ABSD. Our questions are, who should be the one to “exit” from the resale EC that we are going buy under joint names and how many percent of this resale EC we should each be holding (99%-1%, 80%-20%, etc), and if there are other considerations.
For the resale EC which we are going to purchase, we intend to use all the available CPF funds that both my wife and I have.
Below are some information for your study/analysis:
Price of resale EC: 1.4million
Husband’s age:38
Wife’s age: 33
Husband’s annual income: 185,000
Wife’s annual income: 86,000
Husband’s CPF: 93,132.05 (current OA) + 73,255.75 (total principal withdrawn) + 7,137.18 (total accrued interest) = 173,524.98
Wife’s CPF: 45,999.51 (current OA) + 54,371.76 (total principal withdraw) + 4753.72 (total accrued interest) = 105,124.99
If you could kindly advise what is the most sensible strategy we should adopt and what is the amount of cash we will need to come up with after “decoupling” and buying the second private property, that would be very much appreciated.
If there is any further information required, please feel free to let me know.
Many thanks in advance.
Best Regards,
Hi there,
Thanks for the kind words, and it’s great to know that you’ve been enjoying the content so far.
Given the high ABSD rate in Singapore (it’s recently been raised to 20% for locals), it’s only natural that you would need to plan out your property plans and timeline well.
Rest assured, the questions you’ve raised are likely shared by many other buyers. It’s always wise to be prepared, even if you haven’t yet made a decision about decoupling.
For the sake of those who don’t know, decoupling refers to the process of transferring property ownership between co-owners. It is often undertaken for various reasons, such as financial planning and optimising tax obligations. This approach offers an alternative to the “sell one buy two” concept, where one co-owner sells their shares to the other co-owner instead of selling the entire property to an external party.
Before addressing your questions, let’s first examine some advantages and disadvantages of decoupling.
Here are some pros and cons of decoupling.
Pros:
- Avoiding/Minimising Additional Buyer’s Stamp Duty (ABSD)
This is particularly for individuals who are purchasing their second property and onwards. As mentioned, the ABSD has recently been raised to 20% for Singaporeans buying their second property and 30% for their third and subsequent properties. For Singapore Permanent Residents, the ABSD rate is at 30% for their second property and 35% for their third and subsequent properties.
By decoupling, the co-owners can redistribute the ownership shares in order to reduce the property count for the co-owner who is selling his/her shares. This individual can then go on to purchase another property without having to pay ABSD or paying a reduced ABSD, depending on how many properties he/she has, which can result in substantial savings.
Just to be clear, this is not the same as the recent audit IRAS has been conducting on the “99-1 loophole”. This is a separate scenario which looks into cases where the shares are transferred shortly after to another person who already owns at least 1 property so as to minimise the ABSD. - Enhanced Financing Options
The Loan To Value (LTV) limit is an important factor to consider when it comes to financing, as it determines the maximum loan amount that can be obtained in relation to the property’s value.
The LTV limit for buyers taking their first property loan is typically set at 75%, while the remaining 25% can be financed through cash and CPF funds. This higher LTV limit allows for a more manageable down payment, reducing the upfront financial burden for the buyer.
However, for buyers looking to acquire a second property, the LTV limit is significantly lower, typically capped at 45%. This reduced LTV limit translates into a higher down payment, which can pose challenges for buyers who may not have substantial cash reserves or CPF funds readily available.
By transferring ownership from one co-owner to another, the new owner can potentially qualify for a first property loan instead of a second property loan. The ability to access a larger loan amount helps alleviate the financial strain associated with acquiring a second property.
Cons:
- Cost Considerations
Decoupling involves various costs that should be carefully assessed against the potential benefits of decoupling. These include:
– Legal Fees: Just as with any property transaction, a lawyer is essential to handle the legal aspects of the decoupling process. Legal fees can vary based on the complexity of the transaction, the involvement of multiple parties, and the specific services required.
– Valuation Fees: A valuer is typically engaged to determine the current market value of the property. Valuation fees may vary depending on factors such as the size and type of the property.
– Stamp Duty: Stamp duty may be applicable depending on the specific circumstances of the decoupling. The exact amount will depend on factors such as the property value, the number of properties involved, and the ownership structure.
– Mortgage Refinancing Fees: If there is an existing mortgage on the property, refinancing may be required as part of the decoupling process. Mortgage refinancing fees can include administrative charges, legal fees, valuation fees, and potential prepayment penalties. - Financing Challenges
One potential challenge in decoupling is the eligibility of the new owner to obtain a housing loan. If there is an existing mortgage on the property, the co-owner who is purchasing the shares must ensure that they meet the eligibility requirements to undertake the full outstanding loan in their name.
Additionally, when a co-owner sells their shares, any CPF funds utilised, along with accrued interest, must be returned in full to their CPF account. For example, if a property is valued at $1M and the co-owner selling a 1% share has $500K worth of CPF funds in the property, they must put the entire $500K back into their CPF account. This means that a cash top-up will be required since the share value he/she is selling is only worth $10K. If the co-owner selling their shares has contributed a significant amount of CPF funds to the property, decoupling can pose a challenge. The specific challenges may also depend on the ownership structure in place.
Now let’s run through the questions that you’ve raised.
Who should be the one to sell their shares?
The answer to this question can be determined by asking:
Who has the capacity to assume the entire loan?
As previously discussed, the co-owner who is purchasing the shares should have the capacity to assume the entire loan for the existing property solely in their name.
If both owners possess the capability to do so, then it would make sense for the owner with the higher income to sell their shares.
Why?
Because the higher income earner can likely take on a larger loan amount which expands the options for the second property purchase.
What should the manner of holding be?
It is common for buyers to opt for a 99-1% ownership arrangement when looking to decouple in the future. This is primarily driven by the desire to minimise the Buyer’s Stamp Duty (BSD) payable by the individual purchasing the shares. The BSD amount is determined based on the value of the shares being transferred.
To illustrate, let’s consider a property that is valued at $1 million. In a 99-1 ownership structure, the 1% share would be valued at $10K. The BSD payable is calculated based on this $10K value which would amount to just $100.
It’s also important to note that the party selling their shares will be required to return any CPF funds used, along with accrued interest. To avoid the need to top up the CPF in cash, it may be advisable for the potential selling party to minimise their CPF usage from the get-go.
As you’ve mentioned that both you and your wife intend to utilise all your CPF funds for the purchase of the EC, we will do up a simple calculation to demonstrate how this may affect you when decoupling and when one of you goes on to purchase the next property.
Now that we’ve established who should be the one selling and what manner of holding to consider, let’s consider a case study.
Decoupling case study with 100% CPF usage
Since you mentioned that you intend to utilise all your CPF for this purchase, we’ll consider the decoupling case using 100% of your CPF.
First, let’s look at your maximum affordability based on ages 38 and 33, and monthly fixed incomes of $15K and $7K.
| Income From | Maximum Loan Quantum |
| Husband + Wife | $2,443,396 (28-year tenure) |
| Husband only | $1,632,990 (27-year tenure) |
| Wife only | $806,426 (30-year tenure) |
Now let’s consider the case where you fully utilise both your CPF funds of $173,000 (H) + $105,000 (W) for the purchase using the 99-1 ownership arrangement, with you holding 1% share, and your wife holding 99%.
Here are a few things we will assume in our calculations.
- A 75% loan on the $1.4M EC at 4% interest with a 28-year tenure – monthly repayment at $5,200
- Monthly mortgage repayment partially paid with CPF – $1,260 (H) + $1,380 (W)
- Decouple after 3 years so no SSD is payable
- The future sale price remains at $1.4M
To keep the calculations simple, we are assuming that the price remains unchanged given that the selling party is only selling a 1% share, the impact on the final outcome may be insignificant unless there is a substantial increase in the property’s value.
After 3 years, your outstanding loan is $985,102.
CPF used (principal & monthly repayments) plus accrued interest after 3 years: $233,338 (H), $164,568 (W).
This is the breakdown of costs and cash required:
| Seller (H) | Buyer (W) | |
| Shares | 1% | 99% |
| Share value | $14,000 | $1,386,000 |
| Outstanding loan | $9,851 | $975,251 |
| CPF refund | $233,338 | – |
| BSD | – | $140 |
| Legal fees | $3,000 | $3,000 |
| Option fees (5% cash) | – | $700 |
| Exercise fees (20% cash/CPF) | – | $2,800 |
| New loan for buyer | – | $985,751 |
| Loan shortfall for buyer (cash/CPF)* | – | $179,325 |
| CPF top-up for seller (cash)** | $229,189 | – |
The decoupling calculations can be confusing for some buyers, but essentially it functions similarly to a regular buying and selling transaction.
In this process, the seller needs to settle their outstanding loan and return the amount of CPF used from their Ordinary Account (OA). Whatever remains after these deductions will be their profits. In a normal transaction, the above scenario would result in a negative sale due to a CPF shortfall of $229,189. However, in decoupling, there is no concept of a negative sale. Instead, the seller must make a cash top-up to cover the CPF shortfall.
On the other hand, the buyer has to obtain a loan, pay the option and exercise fee, as well as the BSD.
*The loan shortfall for the buyer is a result of the new loan of $985,751 which is higher than your wife’s maximum loan allowed to be taken of $806,426. The difference is $179,325.
**After deducting your outstanding loan of $9,851 from the selling price of $14,000, the profits you’ll make is $4,149. Since you utilised $233,338 of CPF funds, you will have to return this amount to your OA after selling your shares. The CPF top-up required after deducting the profits of $4,149 is $229,189.
Total payable by the seller (H): $3000 (legal fees) + $229,189 (CPF top-up) = $232,189
Total payable by buyer (W): $140 (BSD) + $3,000 (legal fees) + $3,500 (option & exercise fees) + $179,325 (loan shortfall) = $185,965
Since you have both utilised all your CPF funds for the downpayment and monthly repayments, the cash required is $418,014.
Due to your wife’s inability to assume the full new loan, the loan shortfall contributes a considerable sum to the total costs needed.
Let’s consider an alternative ownership structure where you hold 99% while your wife holds 1%, with you purchasing her shares.
This means that you’ll be buying the 1% share which would reduce the likelihood of a loan shortfall since you have the higher income.
| Seller (W) | Buyer (H) | |
| Shares | 1% | 99% |
| Share value | $14,000 | $1,386,000 |
| Outstanding loan | $9,851 | $975,251 |
| CPF refund | $164,568 | – |
| BSD | – | $140 |
| Legal fees | $3,000 | $3,000 |
| Option fees (5% cash) | – | $700 |
| Exercise fees (20% cash/CPF) | – | $2,800 |
| New loan for buyer | – | $985,751 |
| Loan shortfall for the buyer (cash/CPF) | – | – |
| CPF top-up for seller (cash) | $160,419 | – |
Total payable by seller (W): $3000 (legal fees) + $160,419 (CPF top up) = $163,419
Total payable by buyer (H): $140 (BSD) + $3000 (legal fees) + $3500 (option & exercise fees) = $6,640
Total costs required to decouple: $170,059
With no loan shortfall and a lower amount of CPF top-up required, the total costs needed to decouple are significantly reduced.
Considering the maximum loan eligibility of $806,426 (75%) for your wife, she can potentially acquire a property valued at up to $1.075M.
Presuming she purchases a $1.075M property, after deducting the $160,419 of CPF funds that have been topped up into her OA, she will have to pay the remaining $108,331 of the 25% downpayment in cash. Do note that BSD and legal fees have not been taken into consideration.
In your case, it may be difficult for either one of you to minimise your CPF usage due to the downpayment required. Purchasing a $1.4M property would require a minimum downpayment of $350K (minimally 5% in cash, 20% in cash/CPF).
What if we only utilise the husband’s CPF funds?
As previously discussed, it is advisable for the selling party to minimise their utilisation of CPF funds to avoid a significant cash top-up during the decoupling process.
So let’s consider a scenario where we choose to utilise only your CPF funds, which total $173K, without accessing your wife’s funds. As a result, there would be a shortfall of $107K for the 20% portion of the downpayment that can be covered by CPF funds. In this case, apart from the 5% cash downpayment, you would need to make an additional cash top-up of $107K, resulting in a total cash outlay of $177K.
Let’s assume you proceed with this approach, but your wife still pays for a portion of the monthly mortgage with her CPF ($1,380/month).
Outstanding loan after 3 years: $985,102
CPF used (principal & monthly repayments) plus accrued interest after 3 years: $233,338 (H), $51,500 (W)
| Seller (W) | Buyer (H) | |
| Shares | 1% | 99% |
| Share value | $14,000 | $1,386,000 |
| Outstanding loan | $9,851 | $975,251 |
| CPF refund | $51,500 | – |
| BSD | – | $140 |
| Legal fees | $3,000 | $3,000 |
| Option fees (5% cash) | – | $700 |
| Exercise fees (20% cash/CPF) | – | $2,800 |
| New loan for buyer | – | $985,751 |
| Loan shortfall for buyer (cash/CPF) | – | – |
| CPF top up for seller (cash) | $47,351 | – |
Total payable by seller (W): $3000 (legal fees) + $47,351 (CPF top up) = $50,351
Total payable by buyer (H): $140 (BSD) + $3000 (legal fees) + $3500 (option & exercise fees) = $6,640
Total costs required to decouple: $56,991
Cash top-up for the initial purchase: $107,000
Total sum required: $56,991 + $107,000 = $163,991
In this scenario, when your wife proceeds to purchase the next property, the cash downpayment needed will be reduced as she still retains the majority of her CPF funds.
After allowing the $105K in her OA to accrue compound interest for 3 years, it will accumulate to $113,073. Together with the $47,351 topped up into her OA when decoupling, that will add up to $160,424.
To acquire a property valued at $1.075M and take the maximum loan, after deducting her CPF funds of $160,424, she will need to provide an additional cash top-up of $108,326 for the 25% downpayment. This does not include BSD and legal fees.
When comparing these two scenarios of fully utilising or minimising your wife’s CPF contribution, the cost difference is minimal.
| Fully utilise wife’s CPF | Minimising wife’s CPF usage | |
| Decoupling costs | $170,059 | $56,991 (actual decoupling cost) + $107,000 (cash top up required for initial purchase) = $163,991 |
| Cash top-up required for 25% downpayment when purchasing next property | $108,331 | $108,326 |
The reason for this is that when her CPF funds are not utilised for the downpayment of the EC purchase, the resulting shortfall needs to be covered with cash. Therefore, even though the actual decoupling cost is notably lower when minimising her CPF usage, when factoring in the initial cash top-up, the total costs incurred are not significantly different from fully utilising her CPF.
Another option is to completely refrain from using any of your wife’s CPF funds, which would result in a substantial portion of the monthly repayment being paid in cash. Considering a $1.05M loan at a 4% interest rate, the monthly repayment would amount to $5,200. After deducting your CPF contribution of $1,260, the remaining $3,940 would need to be paid in cash.
The total cash required for monthly repayments over a 3-year period without utilising your wife’s CPF would be $141,940. On the other hand, if you opt to use your wife’s CPF, the total cash needed for monthly repayments would be $92,160.
The difference between the two approaches amounts to $49,780. While this difference is relatively insignificant compared to the amount required to top up your wife’s CPF for decoupling ($47,351), it’s worth considering that an additional cash payment of $1,380 each month could impact your lifestyle.
In this case, it might be more sensible to fully utilise her CPF funds for the initial purchase of the EC. This way, you can avoid tying up a significant amount of cash in the property. The cash saved could potentially be used to generate interest in a fixed deposit or invested in other avenues in the meantime.
To summarise
Since we lack information on your available cash reserves, we cannot determine whether decoupling is a feasible option for you. However, from the calculations presented above, you may be able to make that determination yourself.
Opting for a 99-1 ownership arrangement could be advantageous when decoupling, as it would reduce the BSD payable by the buying party. Given your circumstances, it may be preferable for your wife to hold a lower ownership percentage and sell her shares to you since you are capable of taking on the full loan. The calculations indicate that if your wife were to purchase your shares, she would be unable to bear the entire loan, and the resulting loan shortfall would be considerable.
In general, it’s advisable for the co-owner who intends to sell their shares eventually to minimise their CPF usage. However, in your situation, fully utilising your wife’s CPF funds may be the better option, as minimising her CPF usage would result in greater cash outlays with minimal savings when decoupling.
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