What is Lease Buyback and how does it work?

The Lease Buyback Scheme is just another way of how our government intends to transfer wealth to help low-income elderly achieve a certain level of financial independence in their retirement years.

During the recent National Day Rally, Prime Minister Lee Hsien Loong mentioned that the Lease Buyback Scheme (LBS) would be extended to 4-room HDB flats. When you buy a flat in your twenties and thirties, we doubt that you plan to live throughout the full 99-year period. Hence, this announcement by PM Lee was timely and shows that the government has listened to the concerns of Singaporeans.

So how does the LBS work and what are its effects on Singaporeans?

Assumptions:
•    The couple officially holds the keys to the HDB at age 34
•    Currently, both husband and wife are 63 years old
•    Remainder of 70-year lease
•    Average 4-room HDB worth $471,359
•    Retains 30-year lease and selling the remainder 40-year lease to HDB

Results:
•    Obtains $201,386 as payment selling the remainder 40-year lease
•    Lease Buyback bonus of $20,000
•    A total of $221,386
•    Remainder 30-year lease left to stay in the same HDB

Methodology:
•    Couple holds keys at 34, meaning they made their BTO purchase at 29 years old
•    Lived in the HDB for 29 years
•    Average 4-room HDB value is the average of the 4-room median resale value from HDB
•    $201,386 is calculated by using HDB’s example on 3-room flat lease proportion equating to 42.7 percent of the median resale value

a) Will we get over $220,000 in cash by selling the remaining 40-year lease?

This depends on whether you have met the minimum sum (MS) in your retirement account (RA). If you and your spouse have not met the MS of $161,000 from 2015, then the amount will be used to top up your RA first before receiving the remainder in cash. The minimum amount of cash you will receive is the $20,000 LBS bonus.

b) I have sufficient amount in my RA to meet the minimum sum, so how?

You would then receive it entirely in cash. However, we would like to ask you, then why do you want to apply for LBS? You would be better off just holding your HDB and allow its price to appreciate over time or rent it out. You will have better yield for the property.

c) So what would you recommend to Singaporeans who can achieve MS?

We would recommend to Singaporeans who are able to meet the MS to never apply for the LBS programme for these reasons:
1.    You only hold 30-years lease of your property
2.    You can only sell the property back to HDB and not to the open market
3.    Your property will only depreciate from then on and not appreciate despite increasing property prices
4.    You will only get 1x payment from HDB. If you were to rent out your property, given 70 years left, you will have a high probability of making a much greater yield on your property

d) Then why did the government create such a scheme?

As mentioned in the first paragraph, this scheme is to help low-income elderly achieve a certain level of financial independence. That can be achieved by topping up sufficient amount into the RA account to make a CPF Life purchase.

Conclusion

The LBS was created to aid lower income Singaporeans, as an option to provide security when they get older and are unable to generate income for simple survivability.

Hence, we would not recommend average Singaporeans to participate in such a scheme because it will be detrimental to your overall wealth accumulation in the long run.

Special mention

Singapore has been growing rapidly and this is even more visible in recent times. As a country, we should always look out for our countrymen who are lagging behind. A scheme such as LBS is one such method of looking out for Singaporeans after retirement. In addition, NTUC looks out for Singaporeans during the course of active working years by lobbying for the increment of CPF contribution rates by employers.

Article contributed by Marcus Luke Chua, a finance professional with experience in venture capital as well as one of the top three largest international credit rating agencies. He is also a writer for dollarsandsense.sg. Through the website, he wishes to convey the importance of financial literacy and the benefits it will bring in the long run.