How I optimise my home loan repayment strategy after refinancing

Earlier this week, Heartland Boy and Heartland Girl went to the lawyer’s office to sign their new home loan facility agreement. This was the next step after accepting DBS’s Letter of Offer in June. Before making their way to the lawyer’s office, a key decision was made on how to split the home loan repayment expenses between the both of them. Heartland Boy believes that that decision could have a profound impact on their ability to invest in real estate in the future. Here is how he optimises his home loan repayment strategy after refinancing. But before he gets to that point, it is also important to provide the background so as to set the context right.

Heartland Boy’s Current Home Ownership Situation

1. Current 3BR BTO Is Too Small

When he and his fiance applied for a BTO back in 2014, they had chosen a smaller-sized HDB flat to increase their chances of getting a well-located HDB flat. That was the first part of the strategy and it had worked. The second part was to upgrade to a larger-sized residential property when they are allowed to. In the meantime, they will continue to work hard to improve their financial situation since a bigger house in their preferred location will be a more expensive endeavour.

2. Aspire to invest in property

Besides buying property for his own-stay, Heartland Boy also aspires to buy property for investment. Having honed his career in the real estate industry, Heartland Boy would have liked the opportunity to invest in property in the future IF his household financial circumstances permit. This follows Warren Buffett’s maxim of focusing on one’s circle of competence.

3. Attempt to Rectify Home Ownership Arrangement Mistake

The aforementioned points would have been extremely smooth-sailing if not for the defining mistake in his home ownership arrangement. In summary, Heartland Boy had chosen joint tenancy instead of the owner & essential occupier scheme. Such a holding manner meant that both he and his wife will be considered as existing property owners. Compared to the latter scheme, the essential occupier is NOT a home owner after serving the Minimum Occupation Period (‘MOP’). The advantage of not being an existing home owner is that Additional Buyer Stamp Duty (‘ABSD’) will not be incurred for the next home purchase. ABSD is a hefty 12% tax on the home purchase price; definitely a princely sum on a private property by any yardstick.

Even till today, he was quite anguished at the mistake that he has made. Instead of crying over spilt milk, he shall use this refinancing exercise to re-jig his property investment plan.

The Lower Income Earner to Bear Bulk Of Existing Loan

To recap, Heartland Boy had already listed the factors that he was looking for when he refinanced his HDB loan to a bank loan:

• A lower interest rate
• Waiver of penalty/commitment fee due to sale
• Maximise loan tenure
• Cash rebate to offset admin fees

However, he did not explain how they were planning to proportion the home mortgage between them. Well, after a discussion with Heartland Girl and the mortgage consultant, they came to the consensus that the lower income earner between the 2 shall bear the bulk of the existing loan. The higher income earner would use this time to build up his/her CPF OA funds.

After selling their current BTO, the strategy is for the higher income earner to purchase their next property for own stay under his/her name only. In this way, the remaining partner is able to purchase the investment property (under his/her own name only) without incurring ABSD. This is probably the best and most optimal mortgage repayment strategy Heartland Boy could think of with their present financial situation. Of course, this decision is controversial and comes with its own set of financial and legal challenges.

1) More difficult to secure a higher loan quantum

With only 1 person buying the property, the bank would assess the amount of loan to dispense based on one borrower’s salary. In addition, the household would only be able to tap on 1 CPF OA source. All this points to a higher down payment, and a larger proportion in cash, being required.

When the time eventually comes and Heartland Boy’s household cannot afford a bigger house based on a single purchaser’s income, his next best alternative would be to buy the house under both their names. He would most likely set themselves up to be ready for a decoupling strategy by having 1 of them only holding 1% of the shares in the house.

2) No legal ownership

Since the lower income earner will not be named in their next marital home, he/she has no legal ownership over it. Things might still be alright when the couple’s relationship is fine and dandy. However, it also has the potential to quickly spiral into something nasty if there is a need to separate matrimonial assets in the event of a divorce.

Heartland Boy has not spent time to investigate how this can be mitigated further. However, suffice to say that it probably would involve getting a lawyer to draft some form of private contract for the married couple to execute.

Conclusion

At this juncture, Heartland Boy would like to reiterate again that this home loan repayment strategy to give themselves a chance for a possible shot at investing in property is clearly not meant for every couple. It requires a firm commitment and understanding from both partners. Even then, it may all come to nought if their financial circumstances down the road do not permit them to upgrade. On a lighter note, only the completion date to cross over from HDB loan remains the only remaining milestone in their home mortgage refinancing journey. Having calculated that they can potentially save $14,000 from interest expenses by switching to a bank loan, their August deadline cannot come soon enough!

Article published on 26 July 2020