A Guide To HDB Loan Vs Bank Loan In Singapore
Getting keys to your new HDB flat is an exciting experience. But it is also a financial burden that requires proper planning and making major decisions, such as picking the best home loan. There are many types of loans available. One of the questions almost everyone buying a flat asks is whether to take an HDB loan or a bank loan to finance the property purchase .
So, should you go for the unstable but lower interest rate, fewer restrictions, and numerous penalties that come with bank loans? HDB home loans, on the other hand, will provide a higher interest rate, numerous restrictions, but fewer penalties, flexibility, and a low downpayment.
We will help answer your questions by making a comparison of bank loan vs HDB loan, paying attention to the pros and cons of both home loans. And with this information, you can make a sound decision on the best housing loans to buy an HDB flat.
What Is An HDB Loan?
An HDB housing mortgage is a housing loan offered by the Housing and Development Board with an interest rate that is 0.1% above the CPF OA interest rate (ordinary account). It is given to any Singapore citizen with an HDB flat.
The LTV (Loan-to-Value) of HDB loans is 90% of the purchase price for new flats. For resale HDB, it is the lower of 90% of the resale price or value. Note that the remaining lease must cover the youngest buyer to age 95. If it doesn’t, a prorated basis is used depending on the extent that the remaining lease can cover the youngest buyer to age 95.
HDB Loan Eligibility Criteria
HDB loans cannot be used to buy a condo or any other private property. In addition, there are other requirements you need to meet to qualify for an HDB mortgage.
- One or more of the buyers must be a Singapore citizen
- Borrowers should not have previously taken two or more housing loans from HDB
- The average gross monthly household income ceiling limit is $14,000 for families or $21,000 for extended families. For singles purchasing a five-room or smaller resale flat, or singles purchasing a two-room BTO flat in a non-mature estate under the SSC Scheme (Single Singapore Citizen), the income ceiling is set at $7,000
- Singaporeans who own private housing in Singapore or overseas or have disposed of private residential property in the 30 months preceding the application date for an HDB Loan Eligibility Letter (HLE) are not qualified
- Borrowers must not own more than one commercial or industrial property, or one market or hawker stall. You also should be operating your business from the commercial property or have any other source of income
There is an online service on HDB’s website you can use to check your eligibility.
Pros Of Choosing HDB Loan
Here are the benefits of using HDB loans for buying a Singapore flat.
Lower Down Payment
When comparing the differences of HDB vs bank loan in the issue of downpayment, HDB loans carry the day. Due to their high LTV of 90%, a smaller downpayment of 10% is required when using HDB loans. In addition, you have the option to cover the entire cost using money from your CPF ordinary account. But it is best not to use all of your CPF money. You can also use your housing grants or cash to pay for the downpayment of your house.
This makes it suitable for a home buyer with liquidity constraints. You will not have to tap into your emergency funds or use up most of your CPF savings for the downpayment. You will also have part of your money left over for other needs and options, for instance, renovations and buying furniture for your new home.
Ability To Switch Over To Bank Loan
In case you change your mind about using an HDB mortgage or another bank offers a better deal, you can refinance. Switching from HDB loan to bank loan is possible at any time. It will not attract a penalty. But this is not possible for a home owner who has chosen to take a bank home loan. Bank loans have a lock-in period, you cannot switch to an HDB loan during the course of your mortgage period.
This feature of HDB loans gives buyers the alternative to take the HDB home loan during the purchasing process and later refinance with a bank home loan to take advantage of their low rate.
No Early Repayment Penalty
HDB loans allow homeowners to make early repayments with any extra cash they get without attracting a penalty. You can make a partial capital repayment and reduce the HDB loan tenure or monthly installments. The HDB loan calculator on the CPF website can help you determine the new monthly installments payable. Bank loans do not come with this advantage.
The option to make an early loan repayment means homeowners who get an influx of cash flow, such as year-end bonuses can repay their loan and reduce the interest paid over the years. An early loan repayment also makes it easier to relax.
Cons Of Choosing HDB Loan
Using a mortgage from HDB to buy your flat will have one main downside.
Higher Interest Rates
HDB loan interest rate is less competitive than the interest offered by banks. An HDB concessionary loan interest is currently at 2.6%, which is 0.1% above the CPF savings account interest rate.
Since it is determined by the CPF ordinary account (OA) interest rate, HDB loan interest hardly changes. Bank loan interest rates, on the other hand, are lower but subject to fluctuations.
What Is A Bank Loan?
This is a housing loan offered by financial institutions that are regulated by the Monetary Authority of Singapore. They offer a loan-to-value of up to 75% of the purchase price or value, whichever is lower.
The interest rate is based on the current SIBOR (Singapore Interbank Offered Rate). SIBOR is something like interest rate used by banks when they lend to each other. They are based on interest rate movements in the U.S, and it, in turn, influences lending rates for mortgages.
In the past, SOR (Swap Offer Rate) was also used. But with the risk that the U.S. dollar would strengthen against the Singapore dollar after the adoption of a neutral monetary policy, banks stopped using SOR.
Bank Loan Eligibility Criteria
Banks will carry out a credit check before approving any home loan package. You need to have a good credit score. A credit score is a number between 300 and 850 that represents your ability to pay back a loan. A high score represents good credit.
Banks will also consider your Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR). These two factors will show the total gross monthly income that is spent on repaying debts. A borrower is only allowed to spend 60% of their gross monthly income on total debt repayments and only 30% of gross monthly income should be spent on mortgage repayments.
If the bank mortgage will cause your TDSR and MSR to exceed 60% and 30% respectively, you will have to apply for a lesser amount.
Pros Of Choosing Bank Loan
Here are the benefits that taking a bank loan for HDB BTO or resale flat would bring.
Lower Interest Rates
Bank home mortgage interest rate falls between 1.6% and 2.05%, depending on the bank and SIBOR. These are lower interest rates compared to the current 2.6% interest rate for HDB loan, which is 0.1% less than the 2.5% CPF OA rate.
Some banks may also offer perks, such as 24-hour emergency home assistance. However, note that bank loans set a minimum loan amount for borrowers.
There is a list of requirements needed to qualify for an HDB loan. Bank loans come with fewer restrictions. All you need is a good credit score and a low TDSR and MSR to get a bank loan. HDB loans, on the other hand, disqualifies most applications.
For example, there are no income ceilings set for bank loans. HDB loans income ceiling limit, however, locks out couples and families that have a high income, leaving bank loans as their only option to finance the property purchase.
Cons Of Choosing Bank Loan
Taking home loans from banks to buy an HDB flat comes with three main disadvantages.
Higher Down Payment Amount
Unlike an HDB loan, bank loan has a low LTV of 75% of the lower of the purchase price or value. It translates into a significantly high downpayment of 25%, out of which 5% must be paid in cash. This means dishing thousands from your pockets. Payment for the other 20% of your downpayment can be made using money from CPF ordinary account or housing grants. If there are no funds in your CPF account to cover the cost or you do not qualify for a housing grant, you will have to pay the difference in cash or find an alternative source.
Although a 25% downpayment means taking a lower loan amount, the 5% paid in cash may cause liquidity strain. This is because, there are other costs that need to be paid during the buying process and course of the HDB flat, such as stamp duties, additional stamp duty, valuation, and legal fees, and others. Credit cards can be used to pay for some of the fees incurred during the purchasing process of the HDB flat, but some need cash payments.
Penalty For Early Repayment
Bank loans carry a lock-in period and charge a prepayment penalty. The main reason for this is that banks depend on the loan interest to make money. An early repayment reduces the accumulated interest paid over time, reducing the bank’s profit.
Using any cash you get to pay your loan early will have you charged between 1.5 and 1.75% as early repayment penalties. The interest expense you save from making an early repayment will be eaten by this penalty for premature repayment.
Fluctuating Interest Rates
Banks provide home loan packages with either a fixed deposit home rate (FHR), which is pegged at the bank’s fixed deposit rate, or a variable rate package, based on the SIBOR rate. A fixed loan package can provide a constant rate for 3 to 5 years, thereafter, a floating package is used. With other loan packages, rates are variable depending on SIBOR.
This unpredictability of bank rates makes it hard for bank mortgage borrowers to properly plan their finances. It is best to assess your risk appetite first before choosing to use bank loans. For home buyers who are risk averse, go for HDB loans. HDB loan interest rate hardly changes.
HDB Loan vs Bank Loan: The Verdict
In the battle of HDB loan vs bank loan, there are a few major considerations and tips that can help you have a better understanding when making a decision on the mortgage to use when making payment for your flat:
Home loan rates – HDB interest rate may be higher than that of bank loans, but it is more stable and depends on the interest rate on CPF savings in the ordinary account (OA) of HDB. The bank loan interest rates fluctuate depending on market conditions. Your choice of taking an HDB or bank loan will depend on your risk tolerance.
Loan to value (LTV) limit and down payments – The LTV of an HDB concessionary loan is 90% and that of bank home loans is 75%, both rates are of the lower of the purchase price or value. Your choice between a bank loan or HDB loan will depend on the amount of downpayment you can put down based on household income and CPF savings. It will also depend on the maximum loan amount you want to take.
Versatility – If you are wondering if an HDB loan or hdb bank loan will provide the most flexibility, an HDB home loan is the best option. It has no lock in period, meaning you can switch to a bank mortgage at any time. You can also make an early repayment without facing repercussions.
Home loans, bank and also HDB housing loans, need proper financial planning in life. Know how much in installments you will need to pay per month. You should have a way to get cash to finance the installments, even when you do not have an income.
For example, in a situation of retrenchment, planning will ensure your family is not thrown out for non-payment. With HDB loans, you can use the loan calculator HDB to determine the installments. For bank loans, bank officials can give you the information you need about the package.
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