How a couple's two-home dream turned into a debt nightmare

New Paper

4 days ago

If you are over-zealous in wanting to buy a second property, you can lose sight of the risk that such an investment could land you deep in debt as a couple found to their immense cost.
The middle-aged pair were happily living in their $2 million condominium unit and would have had no problems paying off the mortgage, but they chose to "decouple" to buy a second, more expensive property, as part of their retirement planning.
The husband gave up his 50 per cent share in the home so that he could be free to make the next purchase without paying the 20 per cent additional buyer's stamp duty (ABSD) imposed on Singaporeans.
Heavy cash commitment
As in all property transactions, a decoupling among spouses requires huge cash savings, especially if there is a plan to make a second purchase soon after.
In this case, the wife had to pay the stamp duty for her husband's 50 per cent share of the home, which was $1 million. This duty alone came to $24,600, based on the taxman's online calculator.
In addition to such costs, if the husband had withdrawn from his Central Provident Fund account to pay for his first home, he would need to refund the sum plus accrued interest.
Although he can use these funds, which will go to his Ordinary Account after the refund, for his next property purchase, he still needed sufficient cash to do this for giving up his stake in the first home.
Their existing home still had a mortgage of $500,000 then. As both spouses were earning decent salaries, the wife could take over this loan herself.
As they needed more cash to fund the next purchase, she asked the bank to lend her $750,000 by increasing the mortgage on the $2 million condominium unit. This extra loan lifted the total mortgage to $1.25 million.
Buried by debt
Even if you can afford to buy another property, you should never stretch yourself thin by choosing one that is beyond your means.
In this case, the husband, who ran his own business, bought a $3 million investment property that was even more luxurious than his own home. The numbers looked right to him then as he thought he could make a bigger profit by selling it later.
While the purchase was smooth, he did not foresee trouble ahead for his own business, which started having cash flow problems. As he could not pay his creditors, they sued him and rendered him a bankrupt.
As the $3 million property was in his sole name, it was seized by creditors as settlement for his debt. If the couple had bought the unit jointly and paid the ABSD, the wife could have retained half of the sales proceeds, as she was not responsible for her husband's debt.
The couple are not out of the woods yet because the wife had to keep paying the much higher mortgage on their first home.
Two things to consider
a) Affordability and not ABSD: Many families look at decoupling as a ticket to invest in a second property, but not having to pay ABSD does not mean they can automatically afford to own two homes. So do your sums to see if your total family income will comfortably allow you to own two properties, even with higher interest rates.
b) Risk of sole ownership: There are benefits for couples who hold properties in joint ownership because if one spouse dies, the other can inherit it based on the rule on survivorship. Holding a property on your own means that should you face a bankruptcy action, you stand to lose the whole asset.
Ultimately, a good retirement plan is one that allows you to have enough money to spend in old age, not one that burdens you with more debt.