It was reported in the media on the first day of the year that the HDB’s Lease Buyback Scheme (LBS) has now been extended to all HDB flats, including 5-room and larger units, starting from yesterday (1 Jan 2019).

Previously, LBS was only available to owners of four-room or smaller HDB flats. Under LBS, flat owners can sell part of their lease back to HDB to get cash while continuing staying in it.

The extension of LBS to 5-room and larger units was announced by the Govt in Aug last year to help elderly unlock the value of their HDB flats to get cash, as more Singaporeans are finding it hard to retire while the cost of living spirals up.

Unlike other first world countries, the PAP government of Singapore does not believe in implementing pension schemes for Singaporeans. Many elderly Singaporeans in their 60s and 70s with an aging and aching body can be seen working throughout Singapore, sometimes startling even foreign visitors to Singapore.

Nee Soon GRC MP Henry Kwek said of the LBS extension, “The changes will help our seniors fund their retirement by tapping their housing equity, while retiring in the comfort of their own neighbourhood. I expect it to be well-received.”

Pay back to CPF first

To be eligible for LBS, HDB owners must at least be 65 years of age and must not have a gross monthly household income of more than $12,000. The flat must have at least 20 years to sell and owners must keep a minimum of 15 to 30 years of lease to stay, depending on their age.

However, after selling part of their leases, owners must first use the net proceeds to top up their CPF Retirement Account (RA).

  • For households with 1 owner, he or she will have to use the proceeds to top up the RA to the current age-adjusted Full Retirement Sum (FRS).
  • For households with 2 or more owners, each owner will have to use his/her share of the proceeds to top up his/her RA to the current age-adjusted Basic Retirement Sum (BRS).

And after the owners have topped up the RA to the specified requirements above, they are only allowed to retain the cash proceeds of up to a maximum of $100,000 per household.

If there is any remaining proceeds (after the top-up and setting aside of $100,000 cash), owners will have to use their share of the remaining proceeds to further top up their respective RAs to the current FRS, before they can retain any balance in cash as well. In other words, owners must use the cash proceeds to top up their CPF to FRS as much as possible before they can retain any cash balance.

On HDB website, it gave an example of a couple, both 65 years old, who are joint owners of a fully paid 4-room flat worth $450,000 in the market, with 65-year remaining lease. They choose to keep a 30-year lease, and sell the tail-end 35-year lease to HDB for $190,000 (note that the price of a property is not directly proportional to the length of its lease as HDB chooses to “front-load” its lease in the initial years to take into account the “time-value of money”).

The current Age-Adjusted Basic Retirement Sum (BRS) for the couple in the example is $88,000 each. It also assumed that the RA balances of the husband and wife were $20,000 and 5,000 respectively.

So, the bottomline in the given example is that the couple would get cash proceeds of $49,000 ($39,000 for the balance of cash proceeds and $10,000 for the one-time LBS Bonus) after signing up LBS with HDB. They would also get a monthly payout from CPF Life of $860 or $430 each.

At $430 per month per person, it would be deemed by the government to be sufficient since PM Lee said during the National Day Rally last year that hawker centres would be providing economical meal options priced at $3 or less. Hence, at 3 meals a day, each person would only need $270 a month to survive.

Nevertheless, do note that the above example calculation is based on the premise that the 4-room flat is worth $450,000 in the market.

Market value of older HDB flats sliding down

In the media report, it quoted part-time security guard Tang Lum Sui, 68, a widower who lives alone in his Jalan Bahagia 5-room flat is all for the extended LBS.

“I don’t want to move out of Toa Payoh because I have lived here all my life, and I like that my son’s family (living in Qatar) can stay with me whenever they come back to Singapore,” he said. Mr Tang, whose flat has 67 years left on the lease, added, “As long as the terms are favourable, I will go for it.”

However, Mr Tang should be aware that the value of his 5-room flat is no longer as high as before.

For example, according to PropertyGuru, housing agents have been trying to sell 5-room units in block 30 at Jalan Bahagia for close to $600K:

But the value of the units transacted at this block has been observed to be sliding down rapidly in the last few years.

Data on PropertyGuru shows that units at the block were indeed transacting at $500 to $600K from 2014 to mid-2016. But the last 2 transactions which occurred in Mar 2018, however, shows that one was sold at $403,000 while the other at $322,888.

Resale value of older flats has been sliding down ever since National Development Minister Lawrence Wong let the cat out of the bag in Mar 2017 by disclosing that not all old HDB flats are eligible for SER. He added that for most HDB flats, their leases will eventually run out and the flats returned to HDB, which in turn surrenders the land the flats are on back to the State. In other words, the value of the flats will go to zero when their lease ends.

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