Sunday, March 22, 2009 22:25
Retiring backwards?
In Main Stories, Top Story, Uncle Leong, Uniquely Spore • 1,539 views • 13 Comments
Leong Sze Hian
I refer to the article “I can’t take the flat with me when I die” (Today, Mar 2).
In the example cited by Today, a 62 year old male with a 3-room HDB flat, will get $5,000 cash and $5,000 to his CPF, followed by a lifelong monthly income of $530.
In a normal reverse mortgage, the home-owner draws income and is charged interest. On death, the market value of the property is offset against the amounts withdrawn plus interest owing to the financial institution.
Assuming an interest rate charge of five per cent, the sum owing after 30 years is $465,274.
If the value of the flat appreciates at 5 per cent, the market value after 30 years is $1.02 million. So, does it mean that in a sense, the flat-owner may lose $554,726 ($1.02 million minus $465,274)?
Wouldn’t the flat-owner be better off renting out one room for about $450, and retain the equity on the flat?
With inflation, it is also likely that the one-room rental may increase in the future.
Of course, one can take the lease buyback scheme as well as rent out a room, to receive a total monthly income of about $1,000 for a start.
The lease buyback scheme may be a better arrangement than a reverse mortgage, as it takes away the uncertainty of how much a flat may be worth in the future and interest rate fluctuations in a reverse mortgage.
For example, if the return on the 3-room flat valued at $236,000 is three or four per cent per annum, the value after 30 years is only $572,834 and $765,442 respectively.
Historically, I understand that HDB flats have always increased in value as there has always been upgrading to new flats under the Selective En-bloc Resettlement Scheme (SERS), for older HDB flats that reach around 40 years old.
The HDB is in effect, taking the risk that no financial institution will take, of paying $114,000 up-front, which at say five per cent interest, means that it will cost $492,701, to buy the balance 40-year lease of the 3-room flat after 30 years.
There is also no risk for the flat-owner, of having the amounts withdrawn plus interest exceeding the value of the flat.
In this connection, recent media reports highlighted the first case of a private property reverse mortgagor losing his property after only about 10 years.
Another alternative may be to downgrade to a studio HDB flat costing say $70,000, to obtain $166,000 to fund one’s retirement. (Existing HDB flat $236,000 – new HDB studio flat $70,000)
Assuming a rate of return of say 4 or 5 per cent, the $166,000 sale proceeds can give a perpetual monthly income of $553 or $692 without consuming any of the $166,000 capital.
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13 Comments
Do they own a property ?
iliveinuk
This calculation is stupid. It is impossible to predict the trends and movement of the economy. Considering every ten years there has been a major economic disaster, i think the price fluctuations can be discredited.
I think what the gahmen is trying to do here is to instill a better quality of life for the aged. You cannot expect the gahmen to give free handouts to them (yes i will turn old one day) hence the next best alternative for having an improved quality of life yet retaining the roof over their heads is this measure.
The money they are getting will go a long way in ensuring basic necessities and also medical fees covered.
Sometimes i wish we were bigger and richer like the UK to get free handouts like welfare and free medical care. I read somewhere in the daily mirror that it cost the country 140 billion for the healthcare costs of 20million people..
Singaporean
UK is not richer but it is certainly bigger than Singapore. But being bigger actually means their subsidies are larger than compared if Singapore would do the same. Go figure out why UK can do what Singapore cannot. Leong has just opened your eyes to another angle. If you cannot see it initially, you belong to the two thirds of a population who are not savvy enough to notice. But after being brought to your attention and you still cannot see it, then you belong to the unique category of the top 1 percent of any population who die die must do. Caveat Emptor. A fool and his money is soon parted, but at least you are happy doing it. Good Luck!
WHOknowNEXT
THE price of ten years time, they are getting more and more expensive, just
thank the government, and GST could be more than 7 percent.
SZ
2) iliveinuk
“i think the price fluctuations can be discredited.”
With economic crisis, yes, it does bring about financial difficulties, but dos it decrease the price? no…during the crisis, we seldom see deflation to offset the inflation that happens in that past 10 years, so price fluctuations is definitely there.
as yourself this, even in the UK. are the stuff that you are buying the same price as 10 years ago? simple enough?
kf
Actually, a rental room goes for between $400 (for 1 person)-$650 (either for 2 persons or when shorter term rentals were asked for) per month. So the incremental equity can go up by another 50% :-0.
SB
Hi ALL, Please refer to the following reply letter from HDB published in TODAY last month which is self-explanatory. The suggestion will take care of the best of both the scheme and Mr. Leong’s.
TODAY – HDB ’s Lease Buyback scheme
An option, not a last resort
Letter from Lily Wong Jee Choo
Deputy Director
(Policy and Property)
Housing and Development Board
WE REFER to letter “A second chance at home” (Feb 10), on the Lease
Buyback Scheme (LBS). The LBS is a generous scheme specially designed to
meet the needs of the elderly. It allows them to continue living in the same HDB flat and neighbourhood, while leading a more financially secure retirement.
It is an option to unlock the value of the flat, in addition to subletting a room or downgrading to a studio apartment. It would be a missed opportunity
if elderly home owners see the LBS only as a “last resort” for “dire circumstances”, to quote the writer. We hope that those who are eligible will seriously consider whether the scheme suits them. He has suggested for
the tail-end of the flat lease to be redeemable by lessees or their family, some time after they have signed on to the LBS.
We will study this idea as part of the review of the scheme, taking into account public feedback after its launch. HDB will also continue to reach out to the elderly to enhance public understanding of the scheme.
We thank the writer for his views
roomwithalongkang
2) iliveinuk on March 23rd, 2009 1.45 am
“It is impossible to predict the trends and movement of the economy. Considering every ten years there has been a major economic disaster, i think the price fluctuations can be discredited.”
By your rationale, is the CPF interest enough?
Can you retire as planned?
So, no one can be responsible?
So, what do you predict your future will be like?
Oh, i forgot, whatever you predict is unpredictable by your logic.
karangooni
1) Do they own a property ? on March 23rd, 2009 12.25 am
My understanding is what HDB owners own is a LEASE. Its the HDB owns the building. In overseas, not the case.
Correct me if i sala.
SZ
So all in all, you are paying a huge amount for a lease not not for ownership? so slogging your life away to pay for the flat, a roof over your head, and it is still not really yours…how sad is a singaporean life…unless u r MIW
neversaydie
They cheated us of our CPF interest monies by lowering the effective interest rate.
Yet the ex Manpower minister claimed he had increased it over the long run.
So, PAP got us to let them keep our CPF monies longer and yet lower the interest rate for them to use it to fund some funny investments in the future, which we know is probably going to fail.
This kind of embellishment should be banned under the new media law right?
Of course, they are never going to do it.
They set the rules in the first place.
Question is why do we let them do it in the first place or more importantly, why do we let them do it in the future?
With the PAP, you still have to work your ass out.
Without the PAP, you probably have to work your ass out because of the mess they/he left behind but at least you got to say things the way it is and didn’t need a law to enforce that, when we know such a law is only applicable to the opposition and the public, never on MIWs.
aiyoyo
aiyoyo
elites only think of tekan kaki people, squeeze kaki people…
if so smart those elites go n tekan other people, squeeze other people la…
no choice 人在江湖 身不由己
aiyoyo
Hopeless
the price of hdb is still so high during this recession. why worry, sure go up one.
“I can’t take the flat with me when I die”
but you can pass it to your decendants whom you love.