How older Singaporeans can use their property to help retirement

You may have encountered several personal finance sites, financial planners, etc. with scary stories about retirement; the most recent being the campaign that says you need $1.3 million to retire. Now, I’m not a financial planner so I have no comment on that – but the general idea is clear: retiring in Singapore is not cheap, and a source of anxiety for many.

Fortunately, Singapore also has a high home ownership rate. As of 2018, about 91 per cent of Singaporeans own their homes. In this article, I will look at how we can use these properties to support our retirement, while still keeping a roof over our heads. Here are some options to consider, when making your long term plans:

Retirement

Supporting your retirement with your property

  • Lease Buyback Scheme
  • Silver Housing Bonus
  • New assisted living flats
  • Renting out rooms

We will also touch on two options that exist only for private properties, and are only sometimes possible – these are cash-out refinancing, and roll-up mortgages.

1. Lease Buyback Scheme (LBS)

Pros:

  • Convenient as you don’t need to sell the flat / find a new home
  • Even if you outlive the remaining lease, you won’t be homeless (HDB will work with you to find a solution)
  • Get a bonus for topping up your CPF with the proceeds

Cons:

  • You cannot sell the flat or rent out the whole flat anymore
  • No legacy value (you won’t have a flat to leave to your children)

The LBS is ideal for older Singaporeans who want to raise their retirement funds, without having to sell their HDB flat. In essence, you sell back part of your flat’s lease to HDB, rather than selling the entire flat. For example:

Say you are 60 years old, and expect to retire soon. Your HDB flat, which you bought 30 years ago, still has 69 years remaining on the lease. It is highly unlikely that you will need all the remaining lease – and if your children already have their own property, you can’t really give the flat to them anyway.

(If they already own a flat, or a private property, they will have to sell your flat even if you will it to them)

As such, you can “sell” back some of the remaining lease to HDB, and put the money toward your retirement instead. The amount of the lease you can sell back is based on your age:

  • Age 65 to 69: you must have at least 30 years of lease remaining
  • Age 70 to 74: you must have at least 25 years of lease remaining
  • Age 75 to 79: you must have at least 20 years of lease remaining
  • Age 80 and above: You must have at least 15 years of lease remaining

The amount that you get will be determined by HDB; you will receive the valuation after you make an application for LBS (you can still back out if you decide it’s not a sufficient amount).

The money that you receive from the LBS must first go toward your CPF Retirement Account (CPF RA), and this amount is called the top-up requirement.

The top-up requirement varies between $166,000 to $186,000 (or half the amount if there are two or more owners). Anything in excess of the top-up requirement can be kept in cash, to a maximum of $100,000 in cash (if there is more than $100,000 excess, anything above $100,000 will also go into your CPF).

Finally, you will get the LBS bonus:

For topping up your CPF by at least $60,000:

  • $20,000 bonus for 3-room flats
  • $10,000 bonus for 4-room flats
  • $5,000 bonus for 5-room flats

If you top up less than $60,000:

  • $1 for every $3 topped up, for 3-room flats
  • $1 for every $6 topped up, for 4-room flats
  • $1 for every $12 topped up, for 5-room flats

You can see the qualifying requirements for the LBS on the HDB website.

The main advantage of this scheme is that you don’t need to go through the trouble of selling your flat, and finding a new home. It is useful if you need to stay in the same location for some reason, such as your grandchildren living nearby, being close to medical care, etc.

Sometimes, we’re just used to the area, and have all our friends there.

That said, the drawback is quite significant: once you take on the LBS, you can no longer sell your flat on the open market. So if someone later offers you more for your flat, you still can’t sell it to them.

For this reason, I advise that you consult a professional on the resale value / saleability of your flat, to make a fair comparison against LBS proceeds. Some older flats in desirable areas, such as Bishan, Queenstown, etc. can still fetch significant resale value. Do contact me if you need help with this.

2. Silver Housing Bonus (SHB)

Pros:

  • Get a cash bonus for right-sizing
  • Can use even if right-sizing from (some) private homes

Cons:

  • Restrictions on the next property you can buy

If you right-size your home to a smaller flat, that’s at least 3-room or smaller, you can get the SHB. This is a cash bonus of up to $30,000, if you top up at least $60,000 to your CPF from the sale proceeds. For example:

Say you sell your 4-room flat for $400,000. Let’s assume that, by this stage in your life, you have already paid for the flat in full and there’s no outstanding home loan. We’ll also assume there’s no resale levy.

You then right-size to a 2-room flat as your children have since moved out, and you don’t need much space. The 2-room flat costs $230,000.

After right-sizing, you would have $170,000 left over. However, to get the SHB, you top-up $60,000 to your CPF from this amount. The government will then give you $30,000 in cash. This increases your overall gain to $200,000 ($140,000 in cash, and $60,000 more in CPF).

If you top up less than $60,000 to your CPF, you will still get a bonus. However, you will only get half the amount you top-up as a bonus (e.g. if you only top up $20,000, you can still get $10,000 cash bonus).

Note that you can get the SHB even when right-sizing from some private homes; but your private home must not have an Annual Value (AV) that exceeds $13,000. You can check the AV of your property with IRAS. You can also see the qualifying requirements for the SHB on the HDB website.

There aren’t many complaints to be made about the SHB, as it increases your resale gains at little cost to you. However, one drawback is the restriction on your next home – you can only purchase a 3-room or smaller unit, and the next property cannot exceed the value of the one you’re selling.

3. New assisted living flats

Pros:

  • Excellent support for older Singaporeans with healthcare needs, versus just getting a smaller flat
  • Stay in your own home instead of a nursing home, and have a lot more for retirement

Cons:

  • No legacy value (you won’t have a flat to leave to your children)

We have a new type of flat, in the upcoming HDB BTO launch for February 2021. These are assisted living flats, of which there will be an initial 160 units. These flats come with a 24-hour monitoring service, which includes add-ons such as laundry and meal delivery (at additional cost).

The flats themselves – which are up to 366 sq. ft. – can cost as little as $40,000 for a 15-year lease, or $65,000 for a 35-year lease (the maximum possible lease). The basic service package, which includes home maintenance and 24-hour monitoring, is $22,000 for 15 years, and $59,000 for 35 years.

Note that in total, this can mean just $124,000 for a 35-year lease flat, with home maintenance and 24-hour monitoring. That’s about $3,542 per year, which is cheaper than any retirement home in Singapore. Remember that the less you need to spend on healthcare, the more can go toward your legacy or a happy retirement.

In fact, the price makes this a serious contender with the cheapest short-lease 2-room flats, which don’t come with the healthcare support. So if you want to right-size and raise your retirement fund, this is worth considering (if you qualify; check with HDB).

4. Renting out rooms

If you have a 3-room or larger flat, or own a large enough private home, you might consider renting out rooms. Some people are uncomfortable with tenants in the house; but if you don’t mind, it can be a significant source of income.

Renting out one room for $600 a month, for example, is already more than enough to cover the utility bill and conservancy charges. Some condo owners even opt to use the smaller rooms, and rent out the master bedroom for $1,000+ per month.

This method is where dual-key units really show their quality: these are single units that divide into two separate sub-units (e.g. side by side, or one upstairs and own downstairs). This allows tenants and landlords to co-exist, without any infringement on privacy.

(Follow me on Facebook, and I will explain more about the pros and cons of dual-key units in later articles).

Finally, we come to roll-up mortgages and cash-out refinancing

I will only briefly touch on this as they are not always possible, especially if you’re near retirement (unless you have a strong income source still).

Cash-out refinancing can only be done on private properties. This is when you take a loan, using your home as collateral. For example, you might borrow 70 per cent of the value of your $1 million property ($700,000).

The interest rate on cash-out refinancing is considered low, between 1.3 to 1.6 per cent (for comparison, the typical home loan right now is between 1.2 to 1.3 per cent, so you can see why it’s often just called a “second mortgage”).

However, most older Singaporeans will not qualify for this option, especially as there are age restrictions, and you still need to have income; such as from other rental properties. Also, do bear in mind the bank can foreclose on your property, if you can’t repay the loan.

The second option – which is quite uncommon to be frank – is a roll-up mortgage. This is when the bank pays you every month, for a certain number of years. At the end of those years, the bank will gain possession of your property and sell it.

Roll-up mortgages have not been a well-received concept, as there’s a risk that you’ll live too long (what happens if you only get money for 20 years, but you live past the 20 years? Then you’ll have no home and no income!)

It’s also a common argument that roll-up mortgages destroy equity value – your home will likely be worth a lot more in 20 or 30 years, than the amount that you receive from the bank. That’s the whole reason the bank agrees to give you the money after all. You can probably see why owners of freehold private properties are adverse to the notion.

That said, the situation is not cut-and-dried. For these less common solutions, do reach out and I can help advise on whether they’re appropriate. These financing options are complex, and there’s no way to generalise and say whether they’re good or bad; it depends on your situation.

In the meantime, you can find out more on asset progression and real estate investing on RonChong Property.sg. Follow me as I keep you informed and updated on the latest property market happenings.

 

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