Tag Archives: LBS

What is Lease Buyback and how does it work?

Posted on 2 Oct 2014 | Comments Off on 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.

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Why more Singaporeans are asset-rich but cash-strapped

Posted on 11 May 2012 | Comments Off on Why more Singaporeans are asset-rich but cash-strapped

Are we ‘Singa-poor’?

Why more Singaporeans are asset-rich but cash-strapped.

A common gripe amongst many Singaporeans is that they have to spend their savings to pay off home loans and by the time they retire, they find themselves struggling financially as their savings have dried up.

The situation is even more desperate as over 80 percent of Singaporeans live in HDB flats and even though many aren’t high-income earners, they need to pay very high mortgages.

“If an average-income earner buys a new four-room flat, for instance, he may have to pay upwards of S$300,000, while a five-room flat can cost upwards of half a million dollars. By the time he finishes paying his mortgage, he will be close to retirement age and won’t have much left in his CPF (Central Provident Fund),” said 62-year-old retiree David Lim.

Elderly Are Suffering

He added that many retirees and midde-aged Singaporeans find it harder to get jobs and as for younger flat buyers, they will be retired or at least middle-aged by the time they fully pay off their mortgages. Hence, they “will be asset-rich but cash-poor, unless government policies change,” added Lim.

Agreeing with this, property consultant Getty Goh told The PropertyGuru that “it is foreseeable that there could be some issues for Singaporeans who wish to retire in future,” given the high HDB prices.

He was quick to add that the government is rolling out several schemes in aid of “those looking to monetise their HDB flats”. These schemes include the Silver Housing Bonus Scheme and the Lease Buyback Scheme (LBS), which may be used to supplement retirement funds.

However, Goh is aware that owners’ reluctance to sell their flats could be an impediment to the schemes. Many Singaporeans consider their flats “a home and a lot of sentimental value is attached to it,” which is the main reason why the LBS received a low take-up rate.

Schemes Not Working?

Lim is doubtful if such schemes will address the problem effectively, saying “in theory, this sounds good. But in practice, it’s different”.

“If a five-room flat owner downgrades to a four-room flat, the actual profit is only about S$100,000, given the high prices of HDB flats these days. Average- to low-income earners are likely to have to contribute this amount, as well as the government bonus, to their retirement accounts / CPF minimum sum, which cannot be touched until they reach 55. During the waiting time, they are cash-poor.”

Even if the owner gets access to his retirement funds, he will still remain cash-poor, “because the money will be tied up for the next 10 years while the government places it into an annuity till they are 65, whereby they will receive monthly handouts from it, which do not amount to much,” noted Lim.

As such, he feels an owner will still be asset-rich but cash-poor, whether he takes advantage of the Silver Housing Bonus or not.

Goh believes another reason why the elderly are not keen to downgrade is that they “feel that it is not financially worthwhile to downgrade presently”.

“Even though they are able to fetch a premium for their flats currently, they in turn would have to pay a high price for their replacement flats. Unless there is a cheaper and more attractive housing alternative, response for the Silver Housing Scheme will likely be as lukewarm as the LBS.”

Lim said that “those who are not yet middle- or retirement-aged will also remain asset-rich but cash-poor, unless one is living in a HDB flat left to him by his parents and happens to be a high-income earner, for example”.

What more can be done?

When queried on how this issue could be solved, Goh highlighted the government’s efforts to provide studio apartments for the elderly since 1997, but suggested that the government could do more by “increasing the supply of studio flats for sale and educating the elderly on the financial benefits of downgrading”.

Citing HDB’s annual report, Goh noted that total bookings for studio apartments between 2010 and 2011 reached 1,413, far below the 169,866 economically inactive Singaporeans above 65 years of age, based on Census 2010.

“If we use that as an indication of the magnitude of potential retirees, at a steady rate, the number of new studio flats would have to significantly increase to meet the potential demand,” noted Goh.

“At the end of the day, if the elderly are reluctant to cash-out and insist on holding on to their units, the issue of being asset-rich and cash-poor would still remain unresolved.”

Source : PropertyGuru – 11 May 2012

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