Thinking of refinancing your HDB loan? Wondering if you can switch to a bank loan now? Then this guide is for you.
When buying an HDB flat, there are many good reasons for homeowners to take up an HDB housing loan as their first home loan. For one, since homeowners are allowed to borrow up to 85% of the property value, the down payment is potentially more manageable.
Furthermore, interest rates are set to increase. The US Federal Reserve anticipate at least six more quarter-point hikes this year, with three or four more hikes probable in 2023.
With that said, if after a few years, you want a home loan refinancing option with lower interest rates, it is possible to switch from an HDB loan to a bank loan for more savings. In this article, we will guide you along the process and address the following:
- Am I eligible to refinance to a bank loan?
- Why would I want to refinance my home?
- How do I switch from an HDB loan to a bank loan?
- How long will the process take?
When Can I Switch from HDB Loan to Bank Loan?
Many ask, "Can I refinance my HDB loan?" To find out if you are eligible to refinance your home loan from an HDB loan to a bank loan, you need to consider many factors.
| Policy | Ratio/limit |
| Mortgage Servicing Ratio (MSR) | Up to 30% |
| Total Debt Servicing Ratio (TDSR) | Up to 55% |
| Loan-to-Value (LTV) limit | Up to 75% for banks |
Mortgage Servicing Ratio (MSR)
First, there is Mortgage Servicing Ratio (MSR), which refers to the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan being applied for. MSR is currently capped at 30% of a borrower’s gross monthly income.
Total Debt Servicing Ratio (TDSR)
Second, there is Total Debt Servicing Ratio (TDSR), which refers to the portion of a borrower’s gross monthly income that goes towards repaying monthly debt obligations, including property loans and the loan being applied for. The TDSR limit is currently set at 55% and below a borrower’s gross monthly income.
Loan-to-Value (LTV)
Third, the bank’s Loan-to-Value (LTV) limit of up to 75% will apply when you switch over. So, if up till the date, you’ve not repaid at least 25% of your property’s purchase price (or valuation, whichever is lower), you may need to top-up extra cash or CPF to bring it in line with the LTV.
For example, your HDB flat was $400,000 and you took the maximum loan of 85% from HDB ($340,000) when you bought it. It’s been quite a few years since, and so far, you’ve paid off over $40,000 to HDB. Including your initial down payment of $60,000, you’ve paid for over $100,000 or 25% of your property’s price and hence, can move your entire loan balance (75% or less) to the bank.
If you have not paid that much yet, you’ll still only be allowed to refinance, but you’ll still only be allowed to loan up to 75% from the bank, meaning you’ll need to pay the outstanding amount in cash/CPF.
Other HDB Loan Refinancing Eligibility Criteria
Finally, you will also need to meet the other eligibility criteria set by the bank you’re hoping to refinance to. For example, a minimum income criteria will apply, and it will vary depending on the amount the bank loan is for and whether or not you are buying the property on your own or with a co-signer.
If you satisfy all of the above, then yes, you are indeed eligible to switch from an HDB loan to a bank loan. Do note, however, that once you make the switch to a bank loan, you will not be able to refinance back to an HDB loan.
Interest Rates Are Set to Rise Up to 6 Times in 2022
With interest rates set to rise, you can expect that the cost of borrowing will increase in the months ahead. So what can you do about it?
Should I Refinance My HDB Loan?
There is no one-size-fits-all answer to whether or not refinancing an HDB loan is the best decision for you, but here are some factors to consider to help you decide.
HDB Rates Can Be More Stable, But Banks Offer Much Lower Interest Rates
One of the benefits of an HDB loan refinance is the stable interest rate, which is currently 2.6%. This rate is pegged at +0.1% of the CPF Ordinary Account rate, and hasn’t changed for over 10 years. However, while some may appreciate the stability, 2.6% is considered steep compared to the interest rates offered by banks, which have mostly been under 2% in recent years.
Although the difference may seem small at just over 1%, it really does add up over the years. This is usually the main reason why many homeowners choose to refinance their HDB loans as soon as they can do so without any cash outlay — it’s all about the significant savings.
There Are Home Loan Refinancing Promotions, Perks, and Incentives
In order to help customers minimise the cost of refinancing their HDB loan, banks sometimes offer incentives on top of low interest rates. For example, many banks offer subsidies (subject to a clawback clause) to cover fees incurred during refinancing your HDB loan, such as valuation and legal fees.
For example, let’s say the valuation and legal fees cost $214 and $1,600 respectively. The bank might provide $2,000 in subsidies for refinancing customers, which means that the cost of refinancing an HDB loan is waived in such a case.
However, banks sometimes offer these subsidies as a percentage of the loan amount, which means that you might still need to fork out a small sum of money in some cases.
How to Refinance HDB Loan to Bank Loan
1. Compare Mortgage Rates and Packages Available
If you are thinking about how to refinance your HDB loan to a bank loan, do your due diligence by assessing the packages available on the market. Comparing interest rates offered by different banks is one thing, but there are various perks and incentives (see above) offered as well.
2. One Step Closer to Refinancing HDB Loan: Prepare the Necessary Documents and Apply
After finding a bank loan of your choice, you will need a list of documents on hand as part of the application process. They are:
- Your NRIC or passport
- Your HDB flat details
- Your HDB financial information
- Your latest outstanding loan statement
- Your latest Central Provident Fund (CPF) Property Withdrawal Statement, which can be obtained from your CPF account
- Your latest Notice of Assessment from the Inland Revenue Authority of Singapore, which can be obtained from the IRAS MyTax Portal
- 12 months-worth of CPF transaction history, which can be obtained from your CPF account
- Your payslips from the last three months
- Your employment contract (only if you have less than three months of employment)
- Tenancy Agreement and Stamp Certificate (only if you have rental income)
3. Valuation Assessment
Before the home loan refinancing application is approved, the bank will need to assess the value of your property. This will likely be done by a qualified surveyor or valuer sent by the bank itself.
These are valuation professionals commissioned to ascertain a property’s market value based on a series of metrics, such as location, land size, property size, the age and condition of the property, etc.
4. Choose a Law Firm
There are a lot of steps involved in refinancing an HDB loan. Instead of handling everything yourself, almost all homeowners engage a law firm to do the complex work for them.
These tasks can be everything from conveyancing and managing the necessary paperwork to reminding you of when to sign various documents. The typical fees involved should be around $1,500.
5. Adjust Your CPF Contribution (If Applicable)
If you will be using your CPF savings for the monthly instalments it’s important to adjust the amount that is being paid. Your lawyer will assist you with lodging the monthly CPF repayment amount.
How Long Does Refinancing your HDB Loan Take?
The usual turnaround time for processing the switch to a bank loan is about one month.
Ultimately, even though the process might look somewhat complicated on paper, a lot of the heavy lifting is done by the law firm that you hire. Besides, considering the potential savings you get for refinancing from an HDB loan to a bank loan, this might be well worth your time.
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