FAQ: Value of the Tail of the Lease

1. The HDB will soon allow certain categories of owners to keep the next 30 years lease on their flat and sell the tail of the lease back to HDB for its present value. Part of this value can be taken in cash, while the remainder has to be kept in the CPF account.

2. Formula

The value of the tail of the lease depends on two factors:

* The current remaining lease (which can be from 50 to 80 years)
* The interest rate used to compute the value of the tail

In my view, the interest rate to be used by HDB should be from 1% to 3%.

3. Table

The following table shows how much you can get by selling off the tail of the lease:

Value of tail of lease, assuming the owner retains the next 30 years:

For example, if the remaining lease is 70 years and the interest rate used for the calculation is 2% p.a., the value of the 40 year tail (i.e. 70 years less 30 years) is 40.3% of the current value of the property. If the HDB flat is worth $160,000, the value of the tail is $64,480.

If a higher interest rate of 3% p.a. is used in the calculation, the value of the tail is 32.7% of $160,000 or $52,320.

4. Disclaimer

The actual formula that will finally be selected by HDB may differ from my formula.