Selling point of lease buy-back: Its simplicity

Source : Straits Times - 11 Feb 2009

IN AN economic downturn, no one is immune from hardship. But for the elderly, recession can compound difficulties already being encountered. Those with adult-aged children who are able to shoulder the burden of care need not worry too much. But for an increasing number of senior citizens, this is not an option. Indeed, while the recession brings financial independence for the elderly into sharper focus, this is an issue that goes beyond the immediate. In the light of this, the Housing Board programme to offer to buy back a portion of the lease of small HDB flats from the elderly is an innovative approach in mitigating the problem.

First announced in Prime Minister Lee Hsien Loong’s 2007 National Day Rally speech, details of the lease buy-back were recently unveiled for its launch next month. Of course, the programme is not for everyone. The conditions placed - only for owners aged at least 62 of three-room or smaller flats, who have not owned larger HDB or private-sector flats before, and so on - mean it will be available to a limited number of people. But this is a group of seniors who have problems accessing value despite owning property. Usually, the market favours larger flats, as buyers seek to move up the housing ladder. Thus, the programme scores by greatly widening the opportunity to tap locked-in capital.

Next, many elderly citizens are reluctant to sell out in the first place because they do not want to move out of homes in which they have invested practically a lifetime’s work. The programme addresses this since participants will sell only a portion of the remaining lease on their homes. They are able to continue to live in these flats. And if they outlive the leftover lease period, the HDB may either extend the lease or provide alternative accommodation. In the meantime, they receive monthly payouts from an annuity paid for with the lease sale and a portion of a $10,000 grant from the HDB.

The plan addresses issues that a participant may have doubts about. Of course, there will be comparisons made with reverse mortgages, which have not proved popular. Promoting the lease buy-back programme will, to a degree, centre on explaining the difference of the scheme from reverse mortgages - which involve complex considerations of interest rates and property values over time. Ultimately, it is up to home owners to decide if they are comfortable about participating in the programme. One significant virtue of this plan is the simplicity of its structure.