In the article by Straits Times on 13 Jan, it is reported that elders such as the one mentioned in the article, 68-year-old Mr Tan, a single male Singaporean have found a solution to their woes through the HDB Housing Development Board (HDB)’s schemes.

Mr Tan, the retired senior clerk lost the bulk of his $300,000 savings by betting heavily on Toto. He then sold his three-room flat back to HDB under the Lease Buyback Scheme for about $360,000 in 2013 and paid HDB $222,900 for a 30-year lease on the flat, so he could continue to live in it.

It is reported that about $120,000 of the net proceeds is transferred into his CPF Retirement Account, and he receives a monthly payout of $731 from the account. Apart from the monthly payout, he also received a $20,000 bonus in cash.

So we heard what Mr Tan got to gain from the scheme, now let’s try to analyse what this may mean for the HDB.

HDB may stand to gain $2.5 million?

The $222,900 which Mr Tan pays to HDB and if left to compound at 5% for 30 years comes to a sum of $984,971.

The current flat value is $360,000 and if the flat appreciates at say 5% per annum for the 30 year lease, the flat value at the end of 30 years becomes $1.56 million.

So, does it mean that in this case study, the HDB may stand to gain $2.5 million ($984,971 + $1.56 million)?

The net payment by the HDB is actually $132,100 ($360,000 – $227,900) – but of this – $120,000 goes to his CPF account. So, from a cashflow perspective – the $120,000 may be utilised by the Government – such as for example – giving it to the HDB to pay others under the lease buyback scheme.

Flat appreciated at 6.9% p.a.?

The article further touched on the story of Mr Tan of him saying that he wanted to sell his flat in the open market but did not want to do so as he is very used to his surroundings after living in the area for more than 30 years. Mr Tan also said that he brought his flat in Toa Payoh for $45,000 in 1982.

So based on what Mr Tan has shared, the flat that he lived in actually appreciated by 6.9% per annum over the last 31 years – more than the 5% assumed in the above calculations.

Reverse mortgage?

In contrast, let’s examine what normally happens in a typical reverse mortgage in other countries (currently, there are no reverse mortgage schemes in Singapore)

The $20,000 cash CPF Silver Bonus given for using the flat’s sale proceeds to top-up one’s CPF Minimum Sum, plus the $731 monthly CPF Life monthly annuity – compounded at say 5% as a loan – becomes $700,271 after 30 years

So, if the flat owner dies or decides to sell after 30 years – the net proceeds available to the flat owner or his or her estate is $859,729 ($1.56 million – $700,271).
In this sense, the flat owner may end up losing $859,729 while the HDB may gain $2.5 million.

Another short-coming may be that there is the uncertainty as to what happens if the flat owners are still alive after the 30 year lease?

The assurances being given so far that arrangements will be made to enable the lease to be extended, is not good enough.

In contrast, in a typical reverse mortgage in other countries – the retiree gets to stay until his or her death.

HDB may realize gains earlier?

Since Mr Tan is 68 years old, chances are quite low that he will get to live up to the 30 year lease which he has paid for to the HDB.

So, does it mean that the HDB may likely take possession of the flat earlier than the 30 years – and in a way, get to realize their gains on the flat even earlier?

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