I refer to the article "More take up Housing Board's Lease Buyback Scheme" (Straits Times, Jan 13).
It states that "But some like 68-year-old Mr Tan, a single who asked that his full name not be published, have found a solution to their woes in HDB's schemes.
Pay $222,900 to HDB for 30 year lease?
The retired senior clerk lost the bulk of his $300,000 savings by betting heavily on Toto. Last year, he sold his three-room flat back to HDB under the Lease Buyback Scheme for about $360,000. He then paid HDB $222,900 for a 30-year lease on the flat, so he could continue to live in it.
Get $20,000 cash bonus plus $731 monthly?
About $120,000 of the net proceeds have gone into his CPF Retirement Account, and he receives a monthly payout of $731. He also received a $20,000 bonus in cash."
Let's try to analyse what this may mean for the HDB.
HDB may stand to gain $2.5m?
The $222,900 which the HDB flat owner pays to HDB - if compounded at 5% for 30 years is $984,971.
The current flat value of $360,000 - if the flat appreciates at say 5% per annum for the 30 year lease - becomes $1.56 million.
So, does it mean that the HDB may stand to gain $2.5 million ($984,971 + $1.56 million)?
Flat appreciated at 6.9% p.a.?
In this connection, as to "At first, I wanted to sell my flat on the open market. But I've lived here for more than 30 years and am very used to the environment," said Mr Tan, who bought his Toa Payoh flat for $45,000 in 1982"
- the flat actually appreciated by 6.9% per annum over the last 31 years - more than the 5% assumed in the above calculations.
Reverse mortgage?
In contrast, let's examine what normally happens in a typical reverse mortgage in other countries (currently, there are no reverse mortgage schemes in Singapore)
Take monthly income as a loan with the flat as security?
The $20,000 cash CPF Silver Bonus given for using the flat's sale proceeds to top-up one's CPF Minimum Sum, plus the $731 monthly CPF Life monthly annuity - compounded at say 5% as a loan - becomes $700,271 after 30 years
Still get $860,000 after 30 years?
So, if the flat owner dies or decides to sell after 30 years - the net proceeds available to the flat owner or his or her estate is $859,729 ($1.56 million - $700,271).
Flat owner's loss - HDB's gain?
So, does it mean that in a sense, the flat owner may end up losing $859,729, and the HDB may gain $2.5 million?
If alive after 30 years?
Another short-coming may be that there is the uncertainty as to what happens if the flat owners are still alive after the 30 year lease?
The assurances being given so far that arrangements will be made to enable the lease to be extended, is not good enough.
In contrast, in a typical reverse mortgage in other countries - the retiree gets to stay until his or her death.
HDB may realize gains earlier?
Since Mr Tan is 68 years old, chances are quite low that he will get to live up to the 30 year lease which he has paid for to the HDB.
So, does it mean that the HDB may likely take possession of the flat earlier than the 30 years - and in a way, get to realize their gains on the flat even earlier?
Leong Sze Hian
*Leong is the Past President of the Society of Financial Service Professionals, an alumnus of Harvard University, has authored 4 books, quoted over 1500 times in the media , has been host of a money radio show, a daily newspaper column, Wharton Fellow, SEACeM Fellow, columnist for Malaysiakini, executive producer of the movie Ilo Ilo (24 international awards). He has served as Honorary Consul of Jamaica and founding advisor to the Financial Planning Associations of Brunei and Indonesia. He has 3 Masters, 2 Bachelors and 13 professional qualifications.