As published in the Fund and Gains Section (October 2017) of PropertyGuru Newsletter.
For many of my clients, building wealth steadily and preparing for a comfortable retirement are the two most important financial goals they have set in their lives. As a greying nation, this topic has become more commonly discussed in recent years and is set to be an even more significant topic in the years to come.
Whether clients are living in HDB flats, condominiums or landed properties, there are various ways that they can utilise their home equity saved up over the years to provide for a comfortable retirement.
In this article we will explore the options available to different segments of home owners.
For a HDB flat owner, there are 3 ways to unlock equity for retirement needs.
1. HDB Lease Buyback Scheme (LBS)
Goal: This scheme helps flat owners to receive a stream of income in their retirement years while continue living in their properties.
How It Works:
Owners sell part of their flat’s lease back to HDB in return for proceeds that helps them top up their CPF Retirement Account to purchase a CPF Life Plan which pays them a monthly income for life.
This scheme is available to owners of 4 room flats or smaller who have met their MOP and are at least 64 years of age with no other properties. At least one of the owners must be a Singaporean and monthly gross household incomes must not exceed $12,000. The minimum tenure remaining must be at least 20 years. (Other terms and conditions apply)
2. Right Sizing Your Property with Silver Housing Bonus (SHB) Scheme
Goal: Lower-income households get to unlock equity in their homes to provide them an income during their retirement years.
How It Works:
Owners get to enjoy up to $20,000 in cash when they sell their property and utilise part of their sales proceeds to top up their CPF Retirement Account and join a CPF Life Plan that pays them an income for life.
Owners must be at least 55 years of age, met the Minimum Occupation Period (MOP), have a monthly gross household income of less than $12,000, not own any other properties and purchasing a flat not larger than 3 rooms. (Other terms and conditions apply).
3. Renting out rooms for regular income
Retirees whose children have left the nest can monetise their properties through renting out rooms in their flats. This provides them with a stable and regular income that can provide for a basic quality of life in their later years. A 4 room flat owner would usually be able to rent out 2 bedrooms for an average of $400 each while occupying the master bedroom for themselves. For retirees who have the option to live with their children, renting out their entire flat would usually yield at least $1600 to $2000 per month.
Options for Private Property Owners:
Private property owners whose property annual values do not exceed $13,000 get to enjoy the same Silver Housing Bonus benefits if they fulfil the criteria as above mentioned in Point 2.
For owners with higher value private properties, they may choose to unlock equity in their homes through equity loans or private banking facilities.
Equity loans are loans that are taken out when a property has appreciated in value or has its loans paid down partially or fully over time. The beauty of such loans are that they are similar in cost to a mortgage loan (At present writing, 1.4%), and have tenures extending to 75 years of the borrower’s age or 35 years in maximum tenure. This provides retirees with a low cost source of funds that can be deployed to defensive retirement investing strategies to yield higher returns. Take note that banks will have credit checks in place before granting you the loan.
For example: by topping up one’s CPF, one can enjoy up to 3.5% risk-free returns from our Ordinary Account and up to 5% from our Special Account. Retirees above 55 can even enjoy up to 6% returns. Despite the common gripes we are used to reading about CPF, the truth is few investments are available to the masses that can provide such high returns whether the global economy does well or not.
Private banks offer various manners to monetise properties that allows high net worth clients to collateralise their fully paid properties for funds. The options available to such clients vary greatly between straight forward revolving interest loans to complex ones that involve foreign currencies and carry trades.
For example: Investing in a higher yielding foreign currency of 5% while borrowing at 1% interest rates and maintaining minimum float. The nett positive carry provides good returns while still allowing clients to utilise the majority of funds for other yield accretive investments.
In summary, over my years of advising clients on property matters, a common thread exists. Those who have upgraded their properties during their most active work years or have invested in more than one property have more options available to them during their retirement years.
Inflation is as certain as death and taxes – The “fortunate” event that has occured for those who have invested in properties is that the pace of real estate inflation has thus far exceeded the pace of inflation in healthcare, education, food and transportation. This wealth accumulation effect has hence helped many of them hedge against rising costs and provide them greater freedom and flexibility in the later years of their lives.