Buying a house is typically one of the most expensive purchases one can make in a lifetime. In Singapore, the average price for a home is US$915,601, according to CBRE’s Global Living 2020 report. The country’s residential property market is also ranked the third highest in average cost internationally, behind Hong Kong and Munich.
A closer look at Singapore’s market, however, shows a wide range of housing prices for different budgets, ranging from public to private housing. Around 8 in 10 Singaporeans call public housing, in the form of Housing and Development Board (HDB) flats, their homes.
Based on the latest May 2021 Built-to-Order (BTO) launch, new HDB homes for first-time buyers can cost anywhere from just over $100,000 for a 2-room Flexi to around $765,000 for a 5-room flat in a mature estate.
Considering that the nominal median gross monthly income for full-time workers in Singapore (including employer CPF contributions) is $4,534 in 2020, a 6-figure purchase on whichever end of the property price spectrum is a significant undertaking.
Why Many Singaporeans Cannot Separate Their Housing Purchase From Their Retirement Plans
More than 90% of Singaporeans are homeowners and this is because the government has actively encouraged homeownership since early independence. As a nation in its infancy, the government under the leadership of Lee Kuan Yew had wanted Singaporeans to feel a sense of ownership of this land.
The solution was to encourage Singaporeans to take up homeownership. This was facilitated through the Home Ownership for the People Scheme in 1964, which made HDB homes available for sale on a 99-year lease. Before the scheme’s implementation, Singaporeans could only rent HDB apartments.
While homeownership rates did eventually take off, it was only after the government made it possible for citizens to dip into their Central Provident Fund (CPF) accounts to pay for housing. Introduced in 1968, this policy was a hit and it galvanised homeownership rates in the country. Six decades later, some 80% of Singapore’s population live in HDB housing, while 90% of this group own their homes.
One outcome, however, is that many Singaporeans’ retirement plans are locked in with their housing purchase. During a property transaction, most (if not all) of the buyer’s CPF Ordinary Account funds goes towards their housing purchase. These are funds deducted from Singaporeans’ CPF accounts that could otherwise be combined with the CPF Special Account at the age of 55, to make up the funds in the Retirement Account (RA).
The Retirement Account funds our CPF Life which provides regular monthly payouts for Singaporeans from 65 years old onwards. The amount that Singaporeans will need to set aside in our Retirement Sum is determined by the Full Retirement Sum (FRS). For those who turn 55 years old in 2021, the FRS is $186,000.
Hence, if the bulk of the CPF Ordinary Account has been spent on housing, this reduces the amount (including interest accrued) that goes into meeting the Full Retirement Sum in the Retirement Account.
For Singaporeans who own property, we can opt to meet the Basic Retirement Sum (BRS) instead of by pledging their property. The Basic Retirement Sum (BRS) is half the FRS, and once this amount is set aside, the rest can be withdrawn. This, however, will mean that the monthly payouts from 65 years old will be lower.
How To Monetise Your Home For Retirement
For most Singaporeans, monetising one’s property can be one source of retirement funds. The options generally boil down to these three:
#1 Right-sizing (Also Known As ‘Down-sizing’)
For senior Singapore citizens, unlocking the value of their homes by selling it and moving to a smaller, lower-cost home is one way to monetise. This is especially so for families whose adult children have moved out from their homes, after getting married. The government also incentivises right-sizing by making available public housing options of the 2-room Flexi and Community Care Apartments.
For example, let us take an elderly couple with 2 children who live in a 5-room flat. If their adult children get married and move out, their home may now be too big for the remaining couple. They can live in a 2 or 3-room apartment comfortably.
By selling their 5-room apartment for a smaller and cheaper home, they can use the remaining funds from the transaction for their retirement. One drawback is that right-sizing will mean the elderly couple will need to go through a process of searching for a new home and a buyer, as well as furnishing and moving into a new house.
#2 Rental Income
Another popular way to monetise one’s residential property is to draw rental yield from it. For HDB homeowners, they are bound by the minimum occupation period (MOP) of five years before they can rent out their homes.
In the case of the elderly couple whose children have moved out, they have the options of:
- a) Renting out some bedrooms in their house
- b) Renting out their entire home, if they have options of living elsewhere, for example, in one of their adult children’s homes
Homeowners should note that renting out one’s home means managing and /or living with tenants besides one’s immediate family. HDB also has restrictions on rental durations and a cap on the number of tenants.
#3 Lease Buyback
Under HDB’s Lease Buyback Scheme, HDB homeowners can sell the remaining lease of one’s home to the government. The proceeds will first go into topping up the homeowners’ CPF retirement accounts. Once the minimum requirements are met, the balance can then be drawn up to a maximum of $100,000 per household.
Elderly homeowners who have sold their lease back to HDB can continue to live out their remaining years in their familiar home environment while drawing out higher CPF payouts.
The Lease Buyback Scheme may not be suitable for everyone due to its eligibility criteria. For example, all the owners of the flat need to be 65 years or older, and the gross monthly household income has to be $14,000 or less. The owners also cannot sell or rent out the HDB apartment during this period.
What Option To Choose?
Buying a home is a major financial milestone and forms a significant part of the assets for most Singaporeans. Thus, planning for our retirement should include our housing plans. Monetising our housing is one way of doing so. Each option presented here has its pros and cons, and whichever option selected will depend on the homeowner’s preference and circumstances.
Cover image credit: Raymond Quek
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