Buying HDB Resale : How to Minimise COV
TLDR Understanding Cash Over Valuation (COV) is crucial when buying a resale HDB flat in Singapore. COV is the additional...
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TLDR
The Lease Buyback Scheme (LBS) trend among older Singaporeans is slowly gaining momentum, despite initial reluctance. The scheme allows seniors to boost their CPF funds by selling part of their apartment lease without the need to relocate. Challenges such as limited resale options, financial concerns in retirement, changing property market dynamics, and redefining inheritance priorities are key factors influencing the decision-making process. As the population ages rapidly, understanding the trade-offs and benefits of LBS becomes increasingly crucial for sustainable financial planning and generational well-being.
The Straits Times recently highlighted an interesting trend – a growing number of older folks are participating in the Lease Buyback Scheme (LBS). In 2022, there were about 2,860 seniors who utilized this scheme, a small increase from 2,790 the previous year.
Let’s be real though, these figures are still quite small. Compared to the total number of seniors living in HDB flats, 2,860 is like a single drop in a massive rainstorm.
To put it plainly, the LBS isn’t exactly the top choice for most. But here’s a bold prediction – not only will it gain more traction as time goes on, but it might also become a standard option, especially as it undergoes further enhancements. Here’s why:
A Quick Rundown of the LBS
The Lease Buyback Scheme (LBS) is fully explained in this piece, but in short: it’s a method for qualifying Singaporeans to sell the unutilized part of their apartment lease in order to boost their CPF funds, possibly with some extra money on top.
This strategy allows them to secure finances for their post-work years without the necessity of selling their HDB flat outright.
However, a catch exists. Once opted into the scheme, they are unable to list the flat on the open market, which could result in a financial setback, especially if a potentially higher offer emerges in the future. Some individuals might perceive this as a hindrance to their inheritance planning, particularly if they plan to leave the flat to their offspring.
As of now, the scheme doesn’t seem to be gathering much traction, with majority of the senior citizens choosing to retain their flats till the end or opting to sell and downsize instead.
1. Certain Places Cannot Be Duplicated Or Recreated
At its core, the inconvenience of not having an MRT station or mall nearby is a struggle many can relate to, particularly those who have had to relocate due to circumstances beyond their control. I recall my own experience of moving from our comfortable Bedok Reservoir location to a more secluded area during my younger years, which entailed a significant increase in walking distance to the bus stop.
However, the issue takes a deeper tone when considering the elderly population who have established connections with their immediate environment. Familiar faces and daily interactions form an essential part of their routine. In my current neighborhood, it’s common for older residents to not only recognize each other but also know intricate details about their peers’ families, such as their grandchildren’s pets’ names.
Moreover, the elderly tend to be creatures of habit. For instance, certain bus routes become a necessity as those are the only ones they are accustomed to. The prospect of learning new routes adds stress and discomfort, often discouraging them from venturing out.
The increasing complexity of MRT lines, which have evolved from a simple dual line system during my childhood, to a complex network resembling a spider’s web, further complicates matters.
Consequently, the Lease Buyback Scheme (LBS) may gain popularity among Singapore’s aging population, primarily because it eliminates the need for relocation and the associated loss of familiar faces and routines.
By 2030, a significant portion of the population might be above the age of 65. While relocation may seem a thrilling adventure during one’s prime years or even middle age, the perception shifts dramatically as we age.
2. Cashflow And Financing Issues
Many Singaporeans often fail to consider loan tenures and age-based lending restrictions until they’re directly affected. Imagine hitting retirement age and finding that obtaining bank loans has become a significant hurdle. Remember, relocating isn’t cost-free – from hiring movers to sprucing up the new home, cash flow becomes a real concern.
For the younger generation, sourcing multiple loans to cover these expenses isn’t a milestone. However, once you hit the golden age of 65, you might notice that banks aren’t as accommodating with their financial aid.
Additionally, we have elderly citizens who solely depend on their CPF payouts for survival. Not all children can afford to provide luxurious lifestyles for their parents, and given the current birth rates, more seniors will have no offspring to rely on.
That said, I am confident that banks or the government will introduce innovative solutions in this sector, leading to an expansion in financing options for the elderly. This is a necessity, given that seniors are fast becoming a considerable demographic.
However, these elements may still discourage individuals from moving. The LBS, with its ability to boost your retirement payouts without the need for a property agent, could become an increasingly attractive option.
3. The Resale Flat Market In The Future Is Expected To Undergo Significant Changes
In today’s real estate climate, million-dollar apartments are becoming less of an anomaly as demand consistently overshadows supply. This is especially true if you’re a single individual under 35, where the societal expectation might seem to be that you should be hewing out your living space from a mountainside in Bukit Timah.
Looking ahead though, I believe there will be fewer instances where someone might unexpectedly offer you a lucrative price for your apartment, with certain areas being the exception. This contradicts the hypothetical scenario where you agree to the Lease Buyback Scheme (LBS), only to then bemoan your decision when a potential buyer proposes a profitable deal.
As discussed in prior articles, the inevitable reality is that the older generation will one day be no more. Given that HDB flats cannot be owned by foreigners and considering our high home ownership rate—close to 90 percent—most of us will already have our own homes when that time comes. This suggests an abundance of empty flats and subsequently, an increase in supply, which could help stabilize prices in the future.
As for exceptions like prime area flats, I believe their advantageous locations would prompt a larger fraction of people to opt for the LBS and continue living there rather than sell and relocate to a less central place. Considering that buyers of Prime Location Housing (PLH) flats have already agreed to the 10-year Minimum Occupation Period (MOP), it indicates they are content with residing in these conveniently located homes for an extended period, perhaps even permanently.
4. Increasing Awareness That Flats Are Not Great As Inheritances
The discussion above propels us to question: Is it truly detrimental that after engaging in Lease Buyback Scheme (LBS), your apartment yields little towards your offspring’s inheritance?
Surprisingly, the odds of your children inheriting your apartment are quite slim. By the time most Singaporeans reach their 65th birthday, their children already possess their own properties, making additional housing unnecessary.
As for the monetary gain from selling the apartment, here’s an important note: I am not a financial consultant. However, discussions with finance professionals will likely reveal more effective strategies to enhance your children’s inheritance. These strategies could potentially outperform the benefits of bequeathing them a Housing Development Board (HDB) flat.
Fundamentally, it may dawn upon the older Singaporean population that the most beneficial gesture for their children is to secure substantial retirement payouts for themselves. This would involve building a significant Central Provident Fund (CPF) savings account and ensuring daily expenses and medical needs are covered. Achieving this financial independence alleviates a tremendous burden from their children’s shoulders.
In a nation where the population is aging swiftly, the ability to sustain oneself financially is a considerable boon to one’s offspring.
Do remember that this does not imply that children should disregard their parents’ needs.
As this understanding deepens, there might be less opposition towards utilizing LBS. It might be advantageous to let the government reclaim the flat sooner if they’re willing to compensate for it.
If discouraging remarks such as, “You’re forfeiting your equity!” or “Once you opt for it, there’s no turning back!” deter you from considering LBS, it might be worthwhile to reflect on the alternatives.
Could those hypothetical situations prove more distressing than the tangible implications of relocating, such as the associated costs or the loss of a familiar environment?
The likelihood of selling a beloved flat and finding it impossible to return to your old neighborhood, particularly during your golden years, is high.
Ponder over these points. Meanwhile, perhaps the government should deliberate on increasing the cash benefits slightly or exhibiting more generosity. While the remaining lease might be less valuable, enhancing retirement funds could potentially outweigh this downside.
Should You Buy, Sell or Wait?
If you’re reading this, you must be trying to figure out the best course of action right now: is it the right time to buy or sell?
It’s difficult to give an exact answer since everyone’s situation is unique and what works for one person may not necessarily work for you.
I can bring you a wealth of on-the-ground experience and a data-driven approach to provide clarity and direction. From beginners to experienced investors, our top-down, objective approach will help you on your real estate journey.
I can help you by:
- Offering Strategic Real Estate Advice – I can help create a comprehensive plan to guide you through your property journey.
- Connecting Your Home with the Perfect Buyers – Through stunning visuals, an effective communication strategy, and an in-depth knowledge of the market, we’ll ensure your home is presented in the best possible way to fulfill your goals.
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