New Reporter
11-12-23, 13:43
Helping your children buy that private property now may not help them in future
Dec 04, 2023
DESPITE financial help such as the baby bonus, raising children in Singapore can be costly. Expenditure items may include a myriad of enrichment classes and fancy overseas holidays. Spending on further studies abroad adds to costs.
Still, some affluent parents are able and willing to splurge on their offspring, including providing financial help in buying a home.
Parental help fuels liquidity in the private housing and Housing and Development Board (HDB) resale markets. However, such actions could worsen inequality. Some young people may lament the unfairness of peers who get a leg-up in the homeownership journey due to parental help.
One reason why some affluent parents want to help their children buy a home is so that the children continue to live in Singapore and preferably near them.
Nonetheless, there are good reasons for parents to refrain from helping children buy private homes here.
Parents can buy homes here for children, who are under 21 and Singapore citizens, tax-efficiently by way of trusts.
A home purchase via a trust incurs Additional Buyer’s Stamp Duty (ABSD) of 65 per cent upfront. However, remission of ABSD can be granted to trusts with identifiable beneficiaries when certain conditions are met.
All of the ABSD paid can be refunded if the property purchased is a first home for a minor who is a Singapore citizen. The beneficial ownership needs to be vested in the minor and cannot be revoked, amended or subject to any conditions.
For cash-rich parents, buying a private home for a Singaporean minor via a trust seems a good idea. The home can generate rental income as well as potential capital gains. Also, buying a home can be an inflation hedge.
Considerations when buying HDB
However, complications might arise later. The child owns the said home directly upon turning 21. The child who is now an adult needs to sell the said private home if he or she wants to buy an HDB flat with a partner, be it a Build-To-Order (BTO) or resale unit, as existing private homeowners cannot own public housing.
The private home needs to be sold in a timely manner. All applicants and occupiers listed in the application to buy a flat from HDB must not have disposed of any private property in the last 30 months before the flat application.
The above wait-out period from the sale of a private home also applies to buying an HDB resale flat with CPF housing grants and applying for an HDB housing loan. A first-timer couple consisting of two Singapore citizens can receive a grant of S$80,000 for four-room and smaller flats, and S$50,000 for five-room and larger units.
Also, except for persons above 55 who are moving from a private home to a four-room or smaller resale flat, there is a wait-out period of 15 months before private homeowners can buy a non-subsidised HDB resale flat.
Futhermore, applicants for a new executive condomnium (EC) unit must also dispose of any private home 30 months ahead of their EC application. ECs are a hybrid between HDB and private condominiums, which can offer a cost-effective route into private homeownership.
Advantages of BTO route
Some parents want to help their adult children avoid the anxiety of trying to secure a desirable HDB BTO unit. The parents might help fund the down payment to purchase a private home instead.
However, buying a private home first could be financially unwise. The optimal start in the homeownership journey for young local couples is likely through buying a BTO unit.
The HDB is ramping up the supply of BTO units, building more BTO homes in central locations, as well as prioritising the needs of first-timers. It is also looking to launch more BTO projects with waiting times of less than three years.
https://i.imgur.com/HXnarI7.png
Compare two scenarios for a young Singaporean couple, who has S$200,000 of savings to fund a home purchase.
Under Scenario A, the couple buys an HDB BTO four-room unit in a mature estate for S$600,000. Assume the mark-to-market price of this subsided flat is 40 per cent higher.
The couple takes up a 25-year loan from HDB for S$400,000, with an annual interest rate of 2.6 per cent.
Under Scenario B, the couple buys a smaller-sized resale leasehold private home in the suburbs for S$1.2 million. The couple receives S$250,000 from parents and takes up a 25-year loan from a bank for S$750,000, which charges an annual interest rate of 4.25 per cent.
Assume home prices rise by 4 per cent per annum. After 10 years, the HDB flat and private home are worth S$1.24 million and S$1.78 million respectively.
Excluding transaction costs such as stamp duty, buying the BTO unit can yield a profit on purchase price of S$643,000 – higher than that earned from buying the private home of S$576,000.
Additionally, over the 10 years, the monthly loan repayments under Scenarios A and B amount to about S$218,000 and S$488,000 respectively.
With the smaller loan repayments for buying the HDB home, a couple can potentially invest more. Over time, a couple who bought an HDB BTO home can continue to live in their HDB home and buy a private home subsequently to earn passive income as their income and savings rise.
In Singapore, buyers with different budgets have a range of housing options. The quality of public housing is high. Many HDB towns are well-designed and well-maintained, with good amenities as well as connectivity. Among global cities, many young couples here can become homeowners relatively easily.
Still, some affluent parents seek to help their children in their homeownership journey. With small families, such a practice may become increasingly prevalent.
Perhaps, parents should just let their children be. Give them the satisfaction of buying their first home entirely on their own dime.
Private home prices may rise over the long run. However, prices could grow in line with income should the government be able to ensure adequate housing supply and have effective policies to moderate price growth.
Crucially, giving a child a private home or the down payment for such a home, may create unnecessary complications and turn out to be financially suboptimal.
https://www.businesstimes.com.sg/opinion-features/helping-your-children-buy-private-property-now-may-not-help-them-future
Dec 04, 2023
DESPITE financial help such as the baby bonus, raising children in Singapore can be costly. Expenditure items may include a myriad of enrichment classes and fancy overseas holidays. Spending on further studies abroad adds to costs.
Still, some affluent parents are able and willing to splurge on their offspring, including providing financial help in buying a home.
Parental help fuels liquidity in the private housing and Housing and Development Board (HDB) resale markets. However, such actions could worsen inequality. Some young people may lament the unfairness of peers who get a leg-up in the homeownership journey due to parental help.
One reason why some affluent parents want to help their children buy a home is so that the children continue to live in Singapore and preferably near them.
Nonetheless, there are good reasons for parents to refrain from helping children buy private homes here.
Parents can buy homes here for children, who are under 21 and Singapore citizens, tax-efficiently by way of trusts.
A home purchase via a trust incurs Additional Buyer’s Stamp Duty (ABSD) of 65 per cent upfront. However, remission of ABSD can be granted to trusts with identifiable beneficiaries when certain conditions are met.
All of the ABSD paid can be refunded if the property purchased is a first home for a minor who is a Singapore citizen. The beneficial ownership needs to be vested in the minor and cannot be revoked, amended or subject to any conditions.
For cash-rich parents, buying a private home for a Singaporean minor via a trust seems a good idea. The home can generate rental income as well as potential capital gains. Also, buying a home can be an inflation hedge.
Considerations when buying HDB
However, complications might arise later. The child owns the said home directly upon turning 21. The child who is now an adult needs to sell the said private home if he or she wants to buy an HDB flat with a partner, be it a Build-To-Order (BTO) or resale unit, as existing private homeowners cannot own public housing.
The private home needs to be sold in a timely manner. All applicants and occupiers listed in the application to buy a flat from HDB must not have disposed of any private property in the last 30 months before the flat application.
The above wait-out period from the sale of a private home also applies to buying an HDB resale flat with CPF housing grants and applying for an HDB housing loan. A first-timer couple consisting of two Singapore citizens can receive a grant of S$80,000 for four-room and smaller flats, and S$50,000 for five-room and larger units.
Also, except for persons above 55 who are moving from a private home to a four-room or smaller resale flat, there is a wait-out period of 15 months before private homeowners can buy a non-subsidised HDB resale flat.
Futhermore, applicants for a new executive condomnium (EC) unit must also dispose of any private home 30 months ahead of their EC application. ECs are a hybrid between HDB and private condominiums, which can offer a cost-effective route into private homeownership.
Advantages of BTO route
Some parents want to help their adult children avoid the anxiety of trying to secure a desirable HDB BTO unit. The parents might help fund the down payment to purchase a private home instead.
However, buying a private home first could be financially unwise. The optimal start in the homeownership journey for young local couples is likely through buying a BTO unit.
The HDB is ramping up the supply of BTO units, building more BTO homes in central locations, as well as prioritising the needs of first-timers. It is also looking to launch more BTO projects with waiting times of less than three years.
https://i.imgur.com/HXnarI7.png
Compare two scenarios for a young Singaporean couple, who has S$200,000 of savings to fund a home purchase.
Under Scenario A, the couple buys an HDB BTO four-room unit in a mature estate for S$600,000. Assume the mark-to-market price of this subsided flat is 40 per cent higher.
The couple takes up a 25-year loan from HDB for S$400,000, with an annual interest rate of 2.6 per cent.
Under Scenario B, the couple buys a smaller-sized resale leasehold private home in the suburbs for S$1.2 million. The couple receives S$250,000 from parents and takes up a 25-year loan from a bank for S$750,000, which charges an annual interest rate of 4.25 per cent.
Assume home prices rise by 4 per cent per annum. After 10 years, the HDB flat and private home are worth S$1.24 million and S$1.78 million respectively.
Excluding transaction costs such as stamp duty, buying the BTO unit can yield a profit on purchase price of S$643,000 – higher than that earned from buying the private home of S$576,000.
Additionally, over the 10 years, the monthly loan repayments under Scenarios A and B amount to about S$218,000 and S$488,000 respectively.
With the smaller loan repayments for buying the HDB home, a couple can potentially invest more. Over time, a couple who bought an HDB BTO home can continue to live in their HDB home and buy a private home subsequently to earn passive income as their income and savings rise.
In Singapore, buyers with different budgets have a range of housing options. The quality of public housing is high. Many HDB towns are well-designed and well-maintained, with good amenities as well as connectivity. Among global cities, many young couples here can become homeowners relatively easily.
Still, some affluent parents seek to help their children in their homeownership journey. With small families, such a practice may become increasingly prevalent.
Perhaps, parents should just let their children be. Give them the satisfaction of buying their first home entirely on their own dime.
Private home prices may rise over the long run. However, prices could grow in line with income should the government be able to ensure adequate housing supply and have effective policies to moderate price growth.
Crucially, giving a child a private home or the down payment for such a home, may create unnecessary complications and turn out to be financially suboptimal.
https://www.businesstimes.com.sg/opinion-features/helping-your-children-buy-private-property-now-may-not-help-them-future