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HDB Loan vs Bank Loan: How Rising Interest Rates Affect Your Monthly Instalments (2022)

PropertyGuru Editorial Team
HDB Loan vs Bank Loan: How Rising Interest Rates Affect Your Monthly Instalments (2022)
The era of low mortgage interest rates is over. DBS has scrapped its five-year fixed loan package and raised the fixed interest rates for its two- and three-year packages. Meanwhile, UOB and OCBC have also raised the rates on their fixed rate home loan packages.
For those buying private properties like condos, executive condos or landed property, there’s not much you can do. You can only compare the various bank loans and pick the most competitive and suitable one for yourself.

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However, for those buying HDB flats, there is another option: HDB loans.
In this guide, we will answer your question of whether or not you should consider an HDB loan instead of a bank loan right now. We will discuss how the US Federal Reserve’s interest rate hikes are affecting mortgage rates in Singapore, and compare HDB loans with bank loans, specifically in the current environment where interest rates are on an upward trend.

How Existing Home Loans and Bank Interest Rates are Affected

First, let’s understand how the US Federal Reserve’s interest rate hikes affect mortgage rates and home loans in Singapore.
Existing mortgages with fixed rates are hedged and protected against rising and fluctuating rates (at least for a few years), but new fixed rate loans taken will still be subject to higher fixed rates. For example, if you took up a fixed rate home loan last year, and locked in say, 1.3% for three years, then you can enjoy the next three years without worry. However, if you take up a fixed rate home loan today, you may be looking at significantly higher rates of around 2.5%.
On the other hand, floating rates are particularly susceptible to rate hikes. That because floating rates have a reference rate component, as well as a spread that is added on top of that. For example, 3M SORA + 0.9%. When the floating loan reference rates like SIBOR (Singapore Interbank Offered Rate) or SORA (Singapore Overnight Rate Average) increase due to global rate hikes, your overall mortgage rate increases too.
SIBOR is collectively set by multiple banks and highly correlated with the US Federal Reserve’s interest rates. As such, the current rate hikes in the US have a direct impact on home loan rates that are pegged to SIBOR. SORA (Singapore Overnight Rate Average), on the other hand, is backward-looking and based on historical transactions. Thus, any impact on SORA will take a while to take effect.
Either way, rising global rates equate to rising home loan rates, which then equates to higher costs for home buyers and owners in Singapore.

Types of Home Loans in Singapore: HDB Loan vs Bank Loan

Next, let’s talk about the two main mortgage options HDB buyers in Singapore have.
The home loans available can be roughly divided into two camps: the HDB Concessionary Loan, and loans from other financial institutions (FIs) or banks.
For the last two decades at least, the HDB loan interest rate has been a consistent 2.6%. Bank loans or loans from other FIs, on the other hand, are differentially affected based on whether the bank interest rates are fixed or floating. Fixed rate loans have – you guessed it – fixed interest rates for a lock-in period of a few years. Thereafter, interest rates are pegged to a reference rate such as SIBOR or SORA.
Floating rate loans, on the other hand, are pegged to a reference rate and have interest rates that are move in tandem with the market, which cause fluctuations in the monthly instalments you have to pay.
For an in-depth comparison between taking an HDB loan and a bank loan, read our article on loan eligibility, downpayment, and more.

What to Consider When Taking an HDB Loan in 2022

While HDB loan interest rates have been higher than what most banks were offering in the past few years, this could change as bank rates continue to rise in tandem with the global rate hikes.
At the pace that mortgage rates in Singapore are increasing, analysts believe that fixed mortgage rates may reach 2.88% soon, a figure last seen in mid-2019. On the flip side, HDB interest rates have been a stalwart at 2.6% since 1999.
The stable 2.6% interest rate is the key advantage of taking an HDB loan. It is reassuring, and could enable better long-term financial planning and control for homeowners since monthly expenses are unlikely to fluctuate. You can also refinance your HDB loan anytime if the situation changes and you find a more competitive bank loan.
… But the above is assuming that HDB interest rates do not change, and remain at 2.6% for the coming years. Although, given its track record, this is likely, it is not guaranteed. Technically, HDB home loan rates are floating, pegged to +0.1% of the CPF Ordinary Account interest rate. This means it could change, should the Government decide to.
Another benefit of HDB loans is that it requires a lower minimum downpayment of 15%.

What to Consider When Taking a Bank Loan in 2022

Previously, most homebuyers who picked bank loans did so because of the significant savings that came with lower interest rates. Over the past two years, rates have gone as low as under 1%, especially when the US Feds first slashed rates in 2020.
Presently, bank loans are still generally cheaper than HDB’s interest rate, but there is a chance it may soon surpass 2.6%. As mentioned above, global interest rates are expected to continue rising, which means we can expect a similar trend in bank mortgage rates.
This means that although there are still many floating rate packages that offer rates as low as 2.3%, this may increase in the coming months. How long they will remain at a high would depend on the market outlook. Bear in mind that many analysts also predict an impending recession, so interest rates could very well crash again in the near future.
Hence, fixed rate mortgages are particularly appealing in the current climate. If you are able to secure a fixed loan at a competitive rate that you’re agreeable to, you can safeguard yourself from future rate increases in the short term. At the time of writing, there are still fixed rate packages offering rates under 2.6% on PropertyGuru Finance.
Generally, bank loans offer more competitive mortgage rates, but you will need to fork out a higher minimum downpayment of 25% (owing to the maximum 75% loan-to-value limit). Also, note that once you take up a bank loan, you will not be able to switch back to an HDB loan. You can, however, refinance to other bank loans to keep costs low.
With our SmartRefi tool, finding the right time and opportunity to refinance is easy:

Smartrefi

Automatically track your current mortgage against market rates, and receive notifications whenever there are better rates and good opportunities to maximise your savings through refinancing.

Home loan aside, it’s also important to maintain an emergency fund. After all, interest rate hikes rarely happen in isolation and are often accompanied by inflation. With high interest rates and increasing prices of goods and services, managing expenditure and finances will be key in successfully making your home purchase and financing your loan.

No One-Size-Fits-All Solution for Choosing Best Mortgage

The inevitable reality: the current high-interest-rate conditions, and understanding how each loan type is affected will enable more savvy financial decisions, especially when trying to hedge against these rising rates.
If you’re an existing homeowner and are wondering what you can do during such volatile market conditions, Paul Wee, Vice President, PropertyGuru Finance, PropertyGuru Group, has some advice for you. Here are five steps you can consider taking:
  1. Refinance to fixed-rate loan packages to mitigate the likelihood of higher SIBOR or SORA reference rates.
  2. Consider making partial or full repayments if rates become too high via cash and/or CPF to manage cash flow demands.
  3. Consider increasing the use of CPF for monthly loan servicing.
  4. Split or refinance loans into separate fixed or variable loans to spread the risk between two portfolios.
  5. If a homeowner is currently on a SIBOR-linked home loan package, he or she may consider moving to a SORA pegged one, as the latter is a backward-looking rate, and rate increases will lag the former. In addition, SIBOR will cease to be quoted from 2024. Banks may also possibly withdraw SIBOR packages earlier, compelling clients to move to other available packages and exacerbating the risk.
If you’re still unsure about what to do with your home loan amidst the current interest rate hikes, not to worry! PropertyGuru Finance mortgage experts will be able to help with your home loan or refinancing needs!
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Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
PropertyGuru will endeavour to update the website as needed. However, information can change without notice and we do not guarantee the accuracy of the information on the website, including information provided by third parties, at any particular time. Whilst every effort has been made to ensure that the information provided is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner or your bank to take into account your particular financial situation and individual needs. PropertyGuru does not give any warranty as to the accuracy, reliability or completeness of information which is contained on this website. Except insofar as any liability under statute cannot be excluded, PropertyGuru and its employees do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person.

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