In recent years, the trend of purchasing property for children has reached new highs. A 2019 Straits Times article mentioned that while there is not much data on it, there are clear signs that a significant number of wealthy families are purchasing private properties under their children’s names.
Why do parents buy property under their children’s names, and is this something you should follow if you can afford it? Is this trend driven by parents eager to prepare their children for the future, or simply motivated by current financial concerns – and should you follow suit?
The Benefits of Buying Property Under Your Child’s Name
1. Good Investment for Your Child in the Future
Some parents are genuinely concerned that the prices of acquiring private properties in the future will affect their children’s ability to own them. These reasons have made buying a property now, but in their children’s names, a decision popular among some parents who are cash-rich and able to afford the mortgage payments.
If you can make sure that you are in a positive financial situation to service the property’s mortgage and punctually pay the instalments, and if you’re sure the property value will most likely appreciate in the future, then this might be your way forward for your child. However, you will still have to cross the hurdle of ensuring your home loan is approved in such a situation, as some home loans will not be approved if the property is under a child’s name.
If you need guidance, feel free to reach out to our Home Finance Advisors for recommendations and advice.
2. Good Chance to Earn Passive Income for Your Children at an Early Age
Some parents have used a trust system to purchase private property under their child’s name and then rented it out, putting the income toward a savings account for their children in the future. Similar to investments or stock, Singapore’s property market does offer a reliable safe space to hedge your child’s financial future on. If the property is a genuine gift and not a current investment plan but rather setting a store for the future, it is most certainly to the benefit of your child to purchase a property now as prices generally tend to rise.
However – and this is a very big caveat – do note that if you are using a trust system to purchase private property for your child, you will not be allowed to take any home loan to finance it. Hence, this option may not be available for you, and you will have to wait until your child is at least 21.
3. Get Better Financing on the Next Home Loan
This is a common strategy for those who already own one property, if they are going to need financing to afford a second property, as the Loan-to-Value (LTV) ratio for a second-property mortgage is capped at 45%. If you want to get a mortgage that finances more of the property’s cost, as well as a higher LTV, you may opt for this approach, since it counts as a first property for your child and hence is eligible for the full LTV.
However, ensure that the payment for your second property will be paid in full by the time your child matures and is looking to move out from their current family home, so as to ensure they are financially free to make their own purchases and apply for their own lines of credit.
There are clear benefits to purchasing a property under your child’s name. However, that said, there are some drawbacks that might affect your child’s future if you do decide to go on this route to purchase a second property.
1. New Additional Buyer’s Stamp Duty (ABSD) (Trust) of 35%
As of May 9 2022, the Ministry of Finance (MOF) announced that an ABSD of 35% will be imposed on any transfers of residential properties into living trust. For example, if you purchase a property for $2.5 million in trust for your child, you would also have to pay $875,000 in ABSD. According to the MOF, ABSD will henceforth be due even if the beneficial owner is unknown at the time the property is transferred into the trust.
The new ABSD (Trust) is to ensure equality among people. While it is the intention of parents to leave a legacy for their children, others have expressed concern that doing so risks worsening inequality, according to Mr Lam Chern Woon from Edmund Tie.
2. High Risk Investment That Might Affect Child’s Future Credit Score
If you do not have the means to pay the mortgage instalments regularly and end up in arrears, you could adversely affect your child’s future credit. Because you are putting your child at risk through involvement in a mortgage, a history of late payments and other mistakes can affect their ability to get loans for important things such as education or cars in their future. The home is likely to become a money pit and if your child is keen on buying public housing (i.e. an HDB flat) when they are able to do so, their ability to do so may be hampered if they cannot dispose of their “investment home”.
In the scenario that you are still paying the home loan for the private property and your child wishes to settle down and it is hard to let go of the property, this might place you in a tight situation. Even if you are able to sell the property easily, this will still cause delays and inconvenience to your child, as HDB rules require that your child, in such situations, must wait for 30 months after selling off the private property, before he/she is eligible to purchase a BTO flat from them.
3. Chance for Legal Disputes When Family Property Disagreements Arise
Putting a property under your child’s name makes them a legitimate owner. Some parents fail to recognise that. In the scenario that your child reaches that age, they will have the legal rights to sell, rent or take over said property as it is under their name. Your child will have the power to dictate what happens to the property, so do take caution.
Legal disputes over property have occurred within the family when parents and children are unable to come to a compromise as to what to do with the said property, and many a family has been strained or even broken by such disagreements.
4. Your Child Will Not Be Applicable for Government Subsidies or Vouchers
Government subsidies, bonuses or low welfare cuts will not be applicable for most children who are already holding onto one private property. This means goodbye to GST vouchers and so on as they will be considered part of the child’s assets.
Some parents forget this when they decide to purchase property on behalf of their children. Unless you can do without the above, you should reconsider putting your second property under your child’s name.
Best-Case Scenarios to Purchase Property Under your Child’s Name
1. Buy Now for the Future
Save guarding your child’s future to own private property due to the predictable increase of property prices in Singapore is a good reason to purchase under your child’s name. This helps them get a head-start in the financial game or as homeowners in the future.
2. As a Gift for Your Child and Their Spouse
The purchase of a property can financially overstretch some young couples, especially if they have not yet developed a strong income and good cashflow. Buying one in advance to secure their future after marriage is a good opportunity to ensure that they get started on a good financial footing, with a mortgage already mostly or completely paid off.
So Do We or Don’t We?
There are multiple reasons why you might want to purchase a property under your child’s name but taking note of the risks and anticipating at least the more obvious future market trends is vital to ensuring that this is a good decision moving forward, bearing in mind that with your child listed as an owner-borrower for any property purchase you make, a misstep could have consequences on him or her.
Purchasing a second property under your child’s name, whether for your own purposes or as an investment for your child’s future, is more financially momentous than buying it under your own, because you are not just affecting your future, but that of someone else you care for as well. Since purchasing a property under your child’s name isn’t necessarily always a good course of action, you should be very sure before you take the plunge, for yourself and for your child. Always consult with independent expert opinions and seek their advice to weigh the pros and cons specific to your situation, and navigate the legal and financial requirements needed to effect this transaction, to see if this is something you want to proceed with.
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