This is what a couple in their 40s discovered recently after they lost a $3 million home and ended up saddled with huge debts when their two-property dream came crashing down.
In their eagerness to build wealth, they lost sight of the risk that property investment can be a double-edged sword that can turn dreams of cushy retirement into a nightmare of heavy debt if you stretch yourself thin on such big-ticket items.
The irony was that the couple were happily living in their $2 million condominium unit and would have had no problems in paying off the mortgage before they chose to “decouple” and buy the second $3 million property.
“Decoupling” refers to Singapore couples who break up the joint ownership of their first home by having one spouse transfer the share to the other, who then becomes the sole owner.
The aim usually is to allow them to buy another property without having to pay the hefty additional buyer’s stamp duty (ABSD) that is imposed on Singaporeans who purchase second or more homes.
Take a couple – A and B – who jointly own a home. If they buy a second property together, they will need to pay the ABSD of 20 per cent of the purchase price. They can avoid this by “decoupling”, which is widely practised here.
The first step involves A taking his name out of the existing home so that his wife B becomes the sole owner.
As A now does not have a property under his name, he can then buy the second home without paying ABSD, as he is deemed a first-time buyer.
The process is not cheap because the usual legal and property transfer costs will apply.
In addition, people who exit from the property must have enough cash to refund their Central Provident Fund account for the sums plus interest that have been used to pay for the first property.
Decoupling helps couples avoid paying ABSD, which is a legitimate move, as owners are entitled to dispose of their interest in any property as part of financial planning.
However, you should realise that property investment is really not about avoiding paying the ABSD.
If you and your spouse choose to hold a property each, it means you have both doubled your investment risk and this can have grave consequences if your numbers do not add up.
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The couple mentioned earlier lived in a $2 million condominium unit that had an outstanding loan of about $500,000. They could have easily paid this off, but they decided to invest in a second property.
That involved the wife taking over her husband’s 50 per cent share of the unit.
She was earning a good salary and took the opportunity to remortgage the home for another $750,000, presumably because they would need the extra cash for the second property.
This extra loan lifted the total mortgage to $1.25 million but the monthly repayment of about $5,800 was still manageable due to the low interest rate of 1.2 per cent then.
After the decoupling, the husband, who ran his own business, bought a $3 million property on his own.
All was well until the pandemic struck and his business was badly hit. He was sued by his creditors, resulting in him being made a bankrupt.
As the $3 million property was in his sole name, it was seized by creditors as part of the settlement for his debt. To make matters worse, the wife was recently retrenched and had to settle for a new lower-paying job.
She now struggles to pay the mortgage for the first home because the monthly repayments have jumped 30 per cent to about $7,600, given the loan’s current interest rate of 4 per cent.
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Affordability, not ABSD
Many families look at decoupling as a ticket to invest in a second property because the process enables them to skip paying the hefty ABSD. But not having to pay ABSD does not mean they can automatically afford to own two properties, which are pricey assets.
Mr Alfred Chia, chief executive of financial advisory firm SingCapital, has recently come across several families who have been hit by financial woes because they could not keep up with the high costs of owning more than one property.
Many buyers tend to gauge affordability based on whether they can pay the down payment for their investment property because they are counting on rental income to offset mortgage instalments.
But when bank rates began to move up a year or so ago, it meant they faced two sets of loan increases if they are still paying the mortgage of the first home.
Mr Chia advises couples to do their sums to see if their combined income comfortably allows them to own two properties, even if they have to bear higher interest rates.
“Alternatively, they can delay their plan to buy another property until the first mortgage is almost paid up or when their incomes grow substantially,” he adds.
Risks of sole ownership
There are benefits to couples holding properties in joint ownership because if one spouse dies, the other can inherit it based on the rule on survivorship.
If a spouse holds a property on his own and he dies without a will, half the property can go to his parents if the couple have no children.
Even if they have children, the distribution will create additional legal costs because the surviving spouse and children will all have shares in the property.
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Holding a property on your own means that should you face a bankruptcy action, you stand to lose the whole asset.
If your spouse is a joint owner in such cases, there is a chance that the co-owner can keep half of the sales proceeds if they are not implicated in the bankruptcy action.
Extra costs of second property
There are recurring costs in owning another residence, including maintenance charges and higher property taxes for homes not occupied by the owners.
Even if you can lease out the unit and use the income to help offset mortgage payments, you may end up paying more income tax because the rents will increase your overall taxable income.
You cannot ask your non-working spouse to stand in as the “landlord” for your investment property to reduce the tax because tax on rental income is based on your share of the property.
If you are the sole owner, 100 per cent of the rental income will be added to your overall earnings for tax purposes.
Couples should not assume that having more property is the way to go for retirement planning.
Just like any other investment, they can end up in financial trouble if they fail to take note of the risks and affordability involved.
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