Thursday, April 12, 2018

Allow CPF to be used to pay mortgages for short leases

Several people have expressed concern over the difficulty faced by seniors in selling their aging HDB flats to realize cash to down grade to a smaller flat and to use their cash for retirement.

Their aging HDB flats have a lease less than 50 years, compared to the original 99 years.

The problem is an outdated policy that needs to be revised.

Currently, the bank will not finance a mortgage on a lease less than 60 years old. The CPF will now allow the savings to be used to pay for the mortgage to purchase on old flat.

The first step is to allow CPF savings to be used to purchase flats with a lease longer than 20 years. In other words, the threshold should be reduced from 60 to 20 years.

Some people may argue against this change on the grounds that a short term lease is consumption and a long term lease is "investment".

The reality is that all property is partly investment and largely consumption. It is a matter of degree.

A short lease property is cheaper. Although a larger portion of the mortgage payment is consumption, the absolute amount used for consumption is probably the same as for a longer lease property, even though the consumption proportion may appear to be smaller.

If people can get financing to buy short leases at lower prices, there will be a market for the aging HDB flats. The seniors will be able to sell their flats into this market and realise cash for their living needs.

Some younger people may opt to buy a short lease as it is cheaper. By that time, they will also realize that a property is largely consumption. It is similar to renting the property but they are locking up the rental rates over the term of the lease.

If CPF changes its rules, the banks are likely to follow the cue and offer financing for short leases. After all, the banks are financing cars on short lease of up to 7 years. What is the difference between cars and property?

The key is therefore a change in CPF rules. Will our elites who run the government, including the highly paid ministers and civil servants, wake up and deal with this looming issue?

Tan Kin Lian

No comments:

Blog Archive