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When the lease on my HDB flat ends.

Tuesday, May 23, 2017


From Facebook:

What happens to our CPF money used to buy a HDB flat when the lease ends?

Reader:

can I assume that whatever has been used to pay for the flat will be forfeited and we still need to pay back the accrued interest? I have friends who are paranoid over the lease issue cuz they keep on reading the anti hdb and anti CPF articles. End up frightening themselves.

AK:
Tell your friends it is the same anywhere in the world. Leasehold means there is a limited life. Once it is gone, it is gone. Money from CPF used in the purchase of such flats at the end of the lease is gone. 
Logically, if the money is gone, how to pay back?


Reader:
My friend just bought a 940k EA resale 30++y flat recently.

Simplistically, if there is 65 years left to the lease, the reader's friend is paying about $15K a year to lease the flat.

Of course, if we take into consideration time value of money and interest on a housing loan (or interest he could have made if he had not used his CPF money in the purchase), it would be more than $15K a year.

It is good to know that more people are thinking about this issue but don't over think. There is no conspiracy to impoverish anyone.


BTO HDB flats are the most affordable form of housing for Singaporeans and they come with a 99 years lease. Even if we were to live to be a hundred, the lease is more than enough.

The worry is when people pay top dollar for much older 99 years leasehold properties.

There is regulation in place to guard against older CPF members from buying older 99 years leasehold properties using their CPF money:

http://singaporeanstocksinvestor.blogspot.sg/2014/07/financing-purchase-of-hdb-flat-new-or.html


However, this safeguard does not apply to younger people. So, if a young couple decide to pay $1 million for a resale flat that has 65 years left to the lease, they have to be aware of the consequences.

Related posts:
1. Why I stay in a condo?

2. Resale Sengkang or BTO Bidadari?
3. Stop accrued interest from growing!

16 comments:

Spur said...

At end of lease, the money pumped into the property goes to money heaven, or become hell notes if you've been naughty.

Technically you still "owe" your CPF account the amount you've withdrawn for property plus the accrued interest. But not much worry coz you'll probably be very very old by then. 8\

CPF tries to protect against over-consumption of CPF monies for property by
i) guarding against overpaying;
ii) guarding against shorter remaining leasehold properties.

For (i) there's the Valuation Limit and Withdrawal Limit. This gatekeeper doesn't apply if HDB concessionary loan is used for BTO (hmmm).

For (ii) as elaborated in your previous blog post, formulae involving age of homeowners and length of remaining lease comes into play if the remaining lease at time of purchase is less than 60 yrs. As mentioned, anything less than 30 yrs lease no CPF can be used.

So even if you bought a property with 31 or 30 yrs lease left, and you outlive your property, the amount of CPF that you used will be very little.

jasper quek said...

Hi AK,
similar case for leased hold terrace in Geylang.
Good case study material.

http://www.straitstimes.com/singapore/home-worries-surface-as-lease-expiry-looms

Regards
JQ

AK71 said...

Hi Spur,

Love your macabre sense of humour. LOL. ;)

AK71 said...

Hi JQ,

People who think property prices will only go up without giving the issue of lease decay due consideration could be setting themselves up for disappointment.

Phil Hayward said...

It's not like this everywhere. In the UK leaseholders have legal right to extend their lease for a fair price, which is normally a few thousand dollars.

AK71 said...

Hi Phil,

A few thousand dollars sounds like a steal. I found an article on the topic:

http://www.telegraph.co.uk/finance/personalfinance/9060279/Home-owners-urged-to-extend-leaseholds.html

"The method for calculating leasehold extension premiums is complicated and influenced by a number of disputable factors, making the process seem more of an art than a science. These factors include local property prices and predictions of future investment returns, which are used to calculate the sum you would have to give the freeholder to compensate for his not receiving the property back for several more decades. You normally have to pay your freeholder's legal costs, your own legal costs and surveyors fees, which typically total between £4,000 and £5,000."

Spur said...

UK is very different from HDB. Over there leasehold are often in few hundred years' lease. It's only in recent years in London that we see 100-yr or 99-yr lease, due to the very unaffordable London prices (but actually still cheaper than SG private property on price parity comparison!).

In UK, leasehold properties with 60yrs or less are practically unmortgageable & everything has to be conducted on cash basis.

Lease extensions in UK are for additional 90yrs lease.

The trick in UK is to extend the lease before it goes down to 80yrs or less. By extending when your lease still has 81yrs or more, you minimize your costs to high-4-digits or low-5-digits. If you wait till your lease goes below 80yrs, your cost will be in mid-5-digits to high-5-digits.

Won't be surprised if cost will be in 6-digits if only left 20yrs or less on the lease. Which is quite logical if you think about it.

More info below. Although it's dated 2015 but should still be applicable.
http://www.moneysavingexpert.com/mortgages/extend-your-lease

It also has a calculator to compute the cost of lease extension, but it only works if your remaining lease is 60yrs or more.

Just ignore the pound sign & think in terms of SGD. i.e. input in 400,000 for a typical old 4-rm HDB etc.

AK71 said...

Hi Spur,

I am learning new stuff everyday. :)

blazingruby60 said...

hi AK
i m in a dilemma. Can you talk to yourself what you would do if you are in my shoes.Mother is in her late 80s , a widow and living in a 3 bedroom hdb flat in a matured estate. The flat is fully paid up and being in a matured estate there is good connectivity of two mrts and buses unfortunately her flat has only about 50 years of lease left.

She has willed the flat to me but I am not keen in the flat as its small and doesnt meet the needs of my family and the flat being old I have to spend quite a bit of money to renovate it. . I cant rent it out (hdb rules state that I have to stay there for 5 years before I can rent it out). My other option is to activate the lease buyback for mum but the buy back offer from hdb is nothing fantastic (i reckon is about $160k at best for the reminder of the years in the lease). Since a certain person has reminded singaporeans not to pay high prices for leasehold property, the resale market for old flat has become subdued.

Can you again talked to yourself if same situation happen to you what would you have done?
thanks n cheers

AK71 said...

Hi ruby,

If your mom doesn't need any financial help, there is no need to do anything to the flat. When she passes on, just sell the flat since you do not wish to move in.

If your mom needs financial help and would like to continue staying in the flat, then, the lease buyback is a good option. She stays in a familiar environment and gets some spending money.

Phil Hayward said...

Yes, the UK's housing market is very different to here, but maybe it has some lessons for Singapore's future...
In London I own a leasehold flat built in the 1930s which has had its lease extended once. It was reasonably well built and now its listed or gazetted so cannot be torn down. The other leaseholders and myself actually own the freehold so we are all shareholders in the building as we had right of first refusal to buy when the owner wanted to sell.
Anyway, as the housing stock here ages I wonder if political pressure will build for equivalent rights in Singapore?

p.s. I love your blog AK. Please keep talking to yourself.

AK71 said...

Hi Phil,

It would be nice if all 99 years leaseholders have the option to extend their leases here. We see that happening when developers buy old leasehold properties and paying to top up the lease to 99 years. This is allowed because they are rebuilding and there is intensification of land use.

Modern day buildings, if built to code and well maintained, can last for centuries. It is a pity to tear them down after 99 years but this is not even a consideration in Singapore. It is how limited land is here on our tiny island. I saw a plot of land being redeveloped twice in a matter of just 20 years in D9. This was a place I used to drive past everyday to go to work. Madness but that is economics at work.

Even if leaseholders are allowed to top up their leases here eventually (without any redevelopment of the land), going by what developers had to pay to top up leases in recent years, it is likely to be pretty hefty. -.-"

Kamsiah you for loving my blog. ;)

blazingruby60 said...

thanks AK
the answer was swirling in my head but being the only child I need affirmation from someone other than immediate family.
thanks for talking out loud.

cheers..
P.S. we, the readers, like to hear your voice regularly.. :)

Phil Hayward said...

I agree, money will solve this problem eventually. I think it puts a lot of uncertainty and worry on people for no good reason though.
It is a problem for the next generation, but eventually some leasehold HDB or condo with architectural value will reach the end of its lease. Will the occupiers be evicted or asked to rebuy? Singapore would be a much poorer place if all the shophouses and black and whites had been torn down, so hopefully some of our current generation will survive.

AK71 said...

Hi Ruby,

I can understand your situation as I am the eldest child and I try to do what is best for my family, very often, thinking way ahead.

I try to keep things simple these days. Thinking too much is very tiring. -.-"

AK71 said...

Hi Phil,

For now, the official word is that when the land lease ends, the land goes back to the State. What the State does with the land and the building on the land is anyone's guess.

So, unless things change, home buyers here should stay prudent and not pay prices too high for properties with relatively short remaining land leases. It is something that too many regarded as unimportant (and encouraged by vested interests to think so) until Mr. Lawrence Wong sounded a warning.

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