Saturday, 30 September 2023

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Downgrade or Lease buyback? Worse off by $700k?

By Leong Sze Hian

I refer to the article “Lease  buyback scheme leaves retiree $130k richer” (Sunday Times, Apr 14).

Lease buyback?

It states that “His flat, which he bought in 1985, has about 70 years left on the lease. Under the scheme, the HDB bought the unit from him for more than $300,000 and he paid about $170,000 for the 30-year lease.

CPF Life?

Most of the $130,000 net proceeds will be used to top up Mr Kwek’s Central Provident Fund (CPF) Retirement Account, and depending on which CPF Life scheme he opts for, he will receive a monthly annuity of about $700 for his lifetime.

$35,000 cash?

Mr Tan will also get to keep the excess of about $15,000 in cash, on top of a cash bonus of $20,000. He plans to save the money.”

Downgrade may be better?

By downgrading to a same size BTO 3-room at say $150,000 ($20,000 less than HDB’s $170,000 30-year lease) and selling his current 3-room flat in the open market for the same $300,000 that HDB has valued his flat, to derive an extra median Cash-over-valuation (COV) of say $25,000, instead of the Lease buyback scheme, Mr Kwek may be richer by $145,000 ($20,000 price difference between BTO flat and HDB 30-year lease plus $25,000 COV less $30,000 Resale Levy) , instead of $130,000.

$50,000 cash instead of $35,000?

With net cash proceeds of $145,000 by downgrading, instead of $130,000 under the Lease buyback, he can still choose to opt in to the CPF Life Scheme to get the Silver Bonus. The difference being that he would be left with more cash of $50,000 instead of $35,000.

No worry about living beyond 30 years?

He will also not have to worry about himself or his younger brother who lives with him, out-living the 30 years lease under the Lease buyback.

HDB flat continues to appreciate?

Moreover, he may have an increasing asset in his BTO 3-room, which may appreciate to about $648,291 in 30 years’ time, assuming the HDB flat increases at an average of 5 per cent per annum.

Given up all future appreciation under Lease buyback?

In a sense, Mr Kwek’s loss of his current flat’s future appreciation, may be likened to the HDB’s gain, under the Lease buyback.

Assumptions – 2nd timer, MOP, Income Ceiling?

The above is on the assumption that Mr Kwek’s current flat is his first and only HDB flat, and that he has already met the 5-year Minimum Occupation Period (MOP) (he bought in 1985), and has also met the Income Ceiling of $5,000 for BTO 3-room (he is retired).

Alternative options?

I wonder if retirees like Mr Kwek are advised on the alternative of downgrading (in this example to a same size flat), when they enquire about the HDB Lease buyback and Silver Bonus schemes.

Conflict of interest?

As there may be an inherent conflict of interest because of the HDB’s role and financial implications, perhaps retirees could be given independent advice.

Instead of just promoting and educating lower-income Singaporeans about the Lease buyback scheme, perhaps they could also be educated about other alternatives like downgrading.

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