HDB or Bank Loan? 4 Things You Should Always Consider

Young couple calculating income and expenses in preparation for a home loan

Buying a property of any sort is going to be a major financial transaction. For the vast majority of us, we’ll need to take out loans. If the property in question is an HDB flat, then the decision of how to finance it usually falls on either a loan from a bank, or a loan from HDB. But how do you decide which is better for you?

 Deciding between getting an HDB loan or a bank loan is kind of like an expensive multiple choice question based on your preferences: besides just choosing which is the cheaper option, there are other considerations that you might want to look into as well.

Here are some of the main differences that you might wish to consider when comparing the two loans:

  1. Downpayment
  2. Interest rates
  3. Possibility of loan refinancing
  4. Penalties for early and late repayment 

Here’s a quick snapshot of the differences:

Eligibility
  • Several requirements in place such as income ceiling and citizenship requirements
  • A good credit score will usually suffice
Interest
  • Interest rate is the CPF Ordinary Account interest rate + 0.1%
    • Currently 2.6%
  • Interest rates can fluctuate, and depends on the bank and benchmark
    • Currently 1.3% - 2.4%
Downpayment
  • 10% downpayment
    • Fully paid in CPF or cash
  • 25% downpayment
    • 5% in cash, 20% either through CPF or cash
Loan amount
  • Maximum loan value is up to 90% of the purchase price
  • No minimum loan amount
  • Maximum loan is up to 75% of the purchase price
  • Minimum loan amount that’s usually $100,000
Penalty for early and late repayment
  • Early repayment: No penalty
  • Late repayment: 7.5% per annum
  • 1.5% - 1.75%
  • Late repayment: Dependent on bank, but typically not as lenient as HDB

Before we launch into the 4 key aspects you should consider when taking a HDB loan or bank loan, let’s look at the respective eligibility criteria that apply. 

 

What’s the eligibility criteria for HDB loans and bank loans? 

HDB loan  

In the case of a HDB Concessionary Loan, there are several criteria that you need to meet first.

List of eligibility criteria for HDB loan

  • At least one buyer is a Singapore citizen
  • Have not taken two or more housing loans from HDB previously
  • Average gross monthly household income is less than $12,000
  • Average gross monthly household income is less than $6,000 for singles buying 5-room or smaller resale flat, or 2-room BTO flat in a non-mature estate
  • Must not own or have disposed of any private residential property in the past 30 months before the date of application for an HDB Loan Eligibility letter

If you own and operate any commercial properties, do note that there are also other restrictions that will apply to you. You can also make use of HDB’s online eligibility checking service to see if you’re eligible to get a loan.

Bank loan 

If you’re getting a home loan from a bank instead, what they’ll look out for is usually just a good credit score.  

Whether you’re taking a HDB loan or bank loan, something else that will be factored into your application is your loan eligibility based on your total gross monthly income spent on debt repayments. 

The terms Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) might ring a bell here: TDSR refers to a regulation that states that a borrower can only spend up to 60% of his/her gross monthly income on total debt repayments, and MSR, up to 30% of his/her gross monthly income on mortgage repayments.

You can calculate how much of your salary you can put towards a mortgage with our MSR calculator.

Tools and Calculators

You can calculate how much of your salary you can put towards a mortgage with our MSR calculator.

 

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Now, let’s dive into the 4 key factors you should consider when deciding between a HDB loan and a bank loan.

 

#1. With a HDB loan, you get to pay a lower downpayment 

HDB loan 

The HDB Concessionary Loan covers as high as 90% of the purchase price for new flats, and the lower of either the resale price or market value for resale flats. You can also pay the downpayment either with CPF or cash.

Bank loan

Bank loans cover only up to 75%, ever since the July 2018 cooling measures were implemented.

In fact, this 15% difference as compared to a HDB loan can come up to be a significant commitment from your pocket. What’s more, for the 25% downpayment, 5% must be paid in cash. 

Aside from the allure of having to take up a lower loan, do first consider if the cash outlay is feasible before committing to avoid future financial woes.

Downpayment

10% downpayment

  • Fully paid in CPF or cash

25% downpayment

  • 5% in cash
  • 20% in either CPF or cash

Maximum Loan

  • New flats: 90% of the purchase price. 
  • Resale flats: 90% of the resale price or market valuation, whichever is lower
  • 75% of the purchase price

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#2. HDB loan interest rates hardly change

HDB loan

The interest rate used for HDB loans is more straightforward: It uses the CPF Ordinary Account Interest Rate, plus an additional 0.1%. 

This currently works out to be 2.6% and based on our observations, seldom changes. That’s with the exception of the first half of 1999, where the CPF OA interest rate went up to 4.41%.

Bank loan

On the other hand, interest rates for bank loans are more variable. Lenders can choose between a fixed and variable rate. For fixed rate, lenders are typically guaranteed a fixed interest rate for the first three to five years, following which a floating rate package will be used. Due to this relative stability, fixed rates are often offered at a premium compared to variable rate packages.

Lenders can also opt to be pegged to a variable rate. In the past, these packages were mainly pegged to Swap Offer Rates (SOR) and SIBOR (Singapore Interbank Offered Rate). However, banks have since stopped offering SOR rates to lenders due to an increased likelihood that the US dollar will strengthen against the Singapore dollar through Singapore’s adoption of a neutral monetary policy.

Today, variable rates are predominantly made up of SIBOR rates, and have grown to include Board rates and Fixed Deposit rates. SIBOR is the interest rate that banks use when they lend each other money and is influenced by interest rate movements in the US. This, in turn, will affect the local mortgage lending rates.

Borrowers are usually encouraged to first assess their financial portfolios and risk appetites before making a sound decision.

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#3. You can refinance from a HDB loan to a bank loan, but not the other way round 

Loan refinancing, when carefully planned and executed, can help you save money on your home loan. Do note, however, that taking up a bank loan automatically disqualifies you from switching to an HDB loan. The reverse has its limits too: switching from an HDB loan to a bank loan is irreversible.

Loan refinancing can be a tricky process with the numerous considerations to take into account before coming to a decision (think lengthy terms and conditions, legal fees etc.) - any misstep in the process can prove to be costly. 

We recommend approaching a mortgage advisor who’s familiar with the different terms and interest rates offered by banks to guide you through the process smoothly.

You can also use our mortgage refinance calculator to help you determine how much you can save when you refinance.

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#4. There are higher penalties when it comes to bank loans 

HDB loan

HDB loans are not subjected to early repayment penalties. However, HDB charges a late repayment penalty of 7.5% per annum.

Bank loan

Bank loans are subject to early repayment penalties of between 1.5% to 1.75%. For late repayment, the penalty is typically more severe than HDB’s and will depend on the bank. 

In the event of a default in mortgage payments, the mortgagees (banks) have the right to repossess the property and put it up for a mortgagee sale (auction). Having said that, this is usually the last resort that banks adopt; debt consolidation plans/restructuring programmes are measures that can be employed to mitigate these occurrences.

Choosing between the two options can be a tough dilemma, but the decision ultimately boils down to your risk appetite and financial goals. It is wise to speak with a mortgage advisor to get more information so that you can make an informed decision on the best way forward.

Woman with mortgage contract, model house, and house keys

Both types of loans have their pros and cons. Evaluate them carefully before signing on the dotted line.

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Account for your financial goals and risk appetite

HDB loans are generally preferred by risk averse borrowers; this becomes particularly important if the borrower is still fairly young: being bogged down by loans early in their career might be the last thing that they would want to happen to them. HDB loans are also generally more lenient despite higher interest rates, which could work out to be less stressful to finance as compared to a bank loan.

That said, higher interest rates will also mean a higher monthly expenditure. Adding to that, if borrowers are using their CPF monies to pay for their monthly instalments, accrued interest is something that borrowers want to take into consideration as that will affect one’s cash flow for subsequent property purchases.

There are advantages to extending your loan tenure. Additionally, borrowers who feel that they are in-touch with the market and are confident of maneuvering through the complicated process of refinancing to achieve higher savings will probably also prefer a bank loan.

 

If you have decided on a bank loan, and need help deciding between fixed versus floating rates, click here.

Home Financing

If you have decided on a bank loan, and need help deciding between fixed versus floating rates, click here.

Or perhaps you're considering engaging a mortgage broker, here’s the lowdown on how they can help you.

Buying

Or perhaps you're considering engaging a mortgage broker, here’s the lowdown on how they can help you.

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