Updated: Sep 28, 2020
Is It A Good Idea To Buy Property Under Your Child's Name?
Recently, I served a couple who is keen to purchase an investment property. Both husband and wife already owned a property each under their own names. Therefore, another purchase under either of them would mean they have to pay for the Additional Buyers Stamp Duty (ABSD).
In order to help them save on the ABSD and after accessing their financial capability, I suggested the possibility of them buying their next property under the name of their 5 year old child.
However, before you set to do this, make sure you are mindful of the conditions and implications because it may not be as straight-forward as it seems and would not be a suitable solution for everyone.
So, why buy a property under your child's name?
To avoid the ABSD. Under the current cooling measures, Singaporeans need to pay 12 per cent ABSD on their second property and Permanent Residents (PR) must pay 15 per cent. This is a significant amount when you consider the price of a property.
Even if you’re purchasing a mid-ranged property priced at $1 million, the 12 per cent ABSD would mean a stamp duty amount of $120,000. One way to avoid paying ABSD is to simply purchase through your child. That is assuming your child does not have a property of their own. In this way, they would not be subject to ABSD. If your child is too young, below the age of 21, you might be advised to buy the property through a trust, which lists your child as the beneficiary. This means that your child can call for the property to be transferred to them, once they turn 21 years old. In the meantime however, you can still buy the property while avoiding the ABSD.
To get better financing for mortgage loan.
For instance, if you have an outstanding home loan, or if the loan tenure would take you past the retirement age of 65, you will get a much lower Loan to Value (LTV) ratio.
You potentially need to fork out as much as 40 per cent of the property price as down payment.
However, if you buy through your adult child who is 30 years old or younger, your child would be able to get a 30 year loan tenure and the full 75 per cent LTV. By the way, these 2 methods are completely legal. The government authorities are fully aware of what is going on even though they have not taken any actions to close these loopholes, yet!
Well, if you have decided to use a trust, be ready to hand over more than just the keys.
Read on and decide for yourself if it is actually a good idea! Let's say if it’s your true intention to transfer the property to your child anyway, then the answer is a YES.
Buying the property under your child would make sense since you are already dead set on gifting your child a condo at age 21. In this case, you might as well buy it under their name now, and avoid paying ABSD unnecessarily.
This is the perfect 1 stone kill 2 birds solution. You get to avoid ABSD, your child get to enjoy the fruits of your prudent planning when your property gain capital appreciation in the years to come.
However, things get tricky if you are secretly buying that property for investment. Some of the important factors that you need to consider are, 1. A much higher cash outlay, if you are setting up a trust 2. Your child can act against your will, with regards to the property 3. Your child is considered as a private property owner and this comes with all the drawbacks that entails 4. If you mess up the mortgage, you will sabotage your child’s creditworthiness 1. A much higher cash outlay, if you are setting up a trust
NO home loans are granted by the bank if you buy the property under a trust for your child.
Hence, doing so required a 100 per cent cash payment for your property. This alone means that it is out of the question for most Singaporeans. Unless you have the extra spare cash to play this game, you need to seriously consider if the high cash outlay is really worth it. You would be locking up a large amount of capital into this illiquid asset. Some of the key advantages of property investment are the high amount of leverage you can get, and the low bank interest rate environment. You will not be able to leverage on both of these advantages if you pay for the property in full cash. 2. Your child can act against your will, with regards to the property
Lady standing tiding a messed up house That terrible moment when you realise you have given your child a legal right to mess around The biggest threat, of course, is that your children has the right to sell the property after it is transferred to them. And then happily pocket the money. However, another danger of having a property in your child’s name is a reverse mortgage. It is also known as cash-out refinancing. Your child can take out a large bank loan, using the property as a collateral. For instance, let's say you buy a unit at Parc Esta, and put it in your child’s name. Currently, the market value of a 3 bedroom unit is somewhere in the range of $1.4 million.
By adopting a reverse mortgage, your child can readily borrow at least half the value of the property, which is $700,000 in cash! I probably don’t need to spell out the consequences of giving this exorbitant amount of money to, say, a 21 year old who’s really into fast cars. Currently, the interest rate on such a loan is low, often around 1.6 per cent per annum. However, if your child fails to repay this loan, the bank has a right to foreclose on the property. In my experience, it does not take long for a young adult to discover this is possible. So, do expect them to pressure you about it, with persistence and promises to pay you back. Needless to say, those entrepreneurial ones will see it as seed money for their start-ups and pester you for the funding. Other factors to consider are that your child can choose to move in to stay and not let you rent it for rental income. There are even cases where they simply let friends stay for free, thus upsetting your investment plans totally.
3. Your child is considered as a private property owner and this comes with all the drawbacks that entails
Do remember that your child will not be able to buy a HDB flat, once they own a private property. This can cause some problems later, if they want a home of their own but you are still renting out the property bought under their name. And of course, if your child tries to buy a second private property, they will face the ABSD issue which you initially tried to avoid. Not forgetting that many social benefits in Singapore are pegged to the sort of property you own. For instance, a private property owner gets far less when the government disburses freebies like the SG Bonus. In the event they need help from the government, they will often be asked to sell their private property and downgrade.
4. If you mess up the mortgage, you will sabotage your child’s creditworthiness If you are buying through your child just to get a better loan, remember you are not the one listed as a borrower. As far as the banks and the Credit Bureau of Singapore are concerned, your child is the one with the home loan. If you are unable to repay the mortgage for some reason, your child will either have to pay it out of his pocket, or be prosecuted in your place. A history of late payments or worse, a foreclosure will destroy your child’s creditworthiness. Your mistakes can make it impossible for them to secure important loans later, such as car loans, study loans, or a home loan of their own.
It is best to buy under your child’s name if you truly intend it as a gift for them and not as a “stealth investment”. As long as it is a genuine gift for your child, buying it under their name is actually a good idea. Some parents, for example, buy now for their child to secure lower entry prices. Especially when they feel that housing prices will always rise in the long run, so it is prudent to get a home now for their child. After all, Singapore is an attractive investment destination not only within the local community but also foreigner's top investment choice.
Oh, by the way, this is also a smart way to ensure their child will have a roof over their head no matter how high home prices escalate in future. Now that you read about the pros and cons of such a decision, would you buy a property under your child’s name? Voice your thoughts in our comments section below!
ABOUT THE AUTHOR
My passion is to serve my clients in building their wealth through property investments.
With prudent planning, creative tax and financing strategies, it is possible to start your investment journey earlier in life and make time work in your favour for maximum wealth growth.
I will be glad to have a chat with you to learn more about your goals and current situation and provide you a step by step road map towards asset progression.
Jacq Ng 9764 2556