Announcement was made on 3 September 2014 by Prime Minister Lee Hsien Loong during his National Day Rally speech that the scheme would be extended to four-room flats. What is the Lease Buyback Scheme? Is it a viable financial planning tool?
Under the current Lease Buyback Scheme, flat owners sell the tail end of their lease back to HDB while retaining a 30 years lease. The following is an example:
| Mr. John owns a 3 room flat with a remaining lease of 70 years. The current market value is $323,000. Under the current Lease Buyback Scheme, he sells 40 years of lease back to HDB for $138,000. He retains 30 years of lease.
This $138,000 is used to top-up his CPF Retirement Account (CPF-RA) up to the prevailing CPF Minimum Sum less small adjustments to reflect the current age to purchase the CPF Life. CPF Life will provide for him a life long income. Amount in excess of the Minimum Sum will be return back to him in cash. There is also a ‘cash bonus’ of up to $20,000 as an added incentive to opt for the Lease Buyback Scheme. |
With effect from 1 April 2015, the Lease Buyback Scheme will be improved as follows:
- Income ceiling will be raised to $10,000 from current $3000 to allow more household to qualify.
- If there are two or more owners, top-up to the CPF RA is capped at half of the age-adjusted Minimum Sum instead of the full Minimum Sum. This implies more money will be payout in lump sum cash capped at $100,000.
- Ability to choose how many years to retain in contrasts to the current fixed 30 years lease retention.
- Extension to 4 room flat instead of just 3 room and smaller flats.
- $10,000 cash bonus for 4 room flat.
- The Lease Buyback Scheme allows a person to ‘sell’ part of the lease of his flat and yet having the right to stay. The owner does not need to move to another unfamiliar location.
- As many Singaporeans are asset rich but cash poor, the Lease Buyback Scheme helps to unlock the value of the property.
What are the advantages of the Lease Buyback Scheme?
- The Lease Buyback Scheme allows a person to ‘sell’ part of the lease of his flat and yet having the right to stay. The owner does not need to move to another unfamiliar location.
- As many Singaporeans are asset rich but cash poor, the Lease Buyback Scheme helps to unlock the value of the property.
What are the disadvantages of the Lease Buyback Scheme?
There are many disadvantages of the Lease Buyback Scheme namely:
- You cannot sell the entire flat. Effectively you give up all potential property appreciation.
- You cannot sublet the whole flat. Effectively you gave up the potentially lucrative rental yield that comes with subletting the entire whole flat. You could, however, sublet some of the rooms.
- If you pass away before the lease is fully utilised, HDB will reimburse the beneficiaries the residual value of the lease based on straight-line depreciation. The method of calculating this residual value does not take into consideration of time value for money. Example:
| Value of 30 years lease : $132,000.
Return flat after 5 years due to death. Residual Value for remaining 25 years : 25/30 x 132,000 = $110,000. Problem: The “$132,000” value is based on the value of money 5 years ago but no adjustment for time value for money done here. |
- There is no assurance of exactly what kind of housing arrangement will be made if the owner outlives the lease of his flat.
- There is only one market maker. In the other words, the scheme is not subject to any market forces. There is no way to determine whether proceeds of the Lease Buyback Scheme are fair or otherwise.
Is the Lease Buyback Scheme a good financial planning tool?
The Lease Buyback Scheme should only be considered as the financial planning tool of the last resort. This is due to the numerous disadvantages. I do NOT recommend anyone planning for retirement to consider the Lease Buyback Scheme as a financial planning tool at all.
Soon after the National Day Rally, one client of mine feedback to me that he did not feel the urgency to invest and save for retirement anymore due to the availability of the Lease Buyback Scheme. This is a grave mistake.
How to improve the Lease Buyback Scheme?
The Lease Buyback Scheme will become a viable scheme if all the disadvantages are addressed:
- Allow the owner to be able to sell his HDB flat in the open market.
- Allow the owner to sublet the entire HDB flat.
- The residual value of the HDB to be ‘refunded’ back to beneficiaries upon the demise of the owner before the lease expire should be based on valuation similar to those valuation of HDB resale flat, and not a simple straight line depreciation.
- To address the concern of outliving one’s lease, insure this risk. Insurance companies can create such products that in the event the person does not die after certain age, the insurance company will pay the rent to HDB so that the insured can continue to stay. Effectively this is known as a deferred annuity with no bequest.
- Allow the securitisation of the tail end lease of the HDB flat so as to allow the capital markets come into the Lease Buyback Scheme and thus there is no need to be restricted to a single market maker.
Reference: HDB website.
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LBS is only good if you are going to die within 10 yrs i.e. those with a lot of chronic diseases, history of serious stroke or heart disease or stage 3 lung disease etc. And you don’t have much family support & need a bit of money to survive just a few years.
Otherwise, LBS is a lousy deal. HDB gives you only a small amount of money — and most of it will be locked inside your CPF. The actual cash-on-hand is only enough for you to buy NTUC groceries and pay PUB bills for just a few years.
In exchange, you surrender most of your property rights to HDB — your flat really really becomes like a rental flat. The normal 99-yr HDB is already so restrictive (you are actually not the owner, not even if you fully paid-up the HDB flat).