If you’re like most Singaporeans, having your first home be an HDB flat would be part of your adulthood ‘life starter pack’. And to finance this purchase, you might take on an HDB-granted loan.
In the era of rising interest rates, those who are currently servicing an HDB loan may be thanking their lucky stars that the HDB loan interest rate remains at an unwavering 2.6%. But did you know that HDB’s concessionary mortgage rate is not permanently fixed?
And given that bank mortgage rates have been rising, will the HDB loan interest rate increase in 2022 too? How is the HDB housing loan interest rate even calculated? In this article, we’ll walk you through these questions and more.
What Is the HDB Home Loan Mortgage Rate?
As mentioned, the current HDB housing loan interest rate is 2.6%, pegged at 0.1% above the CPF Ordinary Account (OA) interest rate of 2.5%. The HDB housing loan uses the CPF OA as a reference rate because the funding from the Singapore government to HDB is based on the same rate.
The CPF OA interest rates can be adjusted in the months of January, April, July and October. But the HDB home loan mortgage rate has remained unchanged for the last two decades, since 1999. Due to the ‘unchanging’ nature of this ‘fixed’ rate, young homeowners are provided with some certainty when budgeting for their HDB flat.
So, why is the HDB mortgage rate set at 0.1% above the CPF OA rate? The answer’s simple: it’s to cover HDB’s cost of loan administration.
History of HDB Home Loan Rates from 1955 till Now
However, just because the HDB home loan interest rate has been unchanged for a long time, it doesn’t mean it will necessarily stay fixed. If the CPF OA interest rate is adjusted, so will the HDB home loan interest rate.
A quick look at historical CPF interest rates shows that the highest CPF OA rates have been is 6.50%, from 1974 to Jan-Feb 1986.
Then the next question is: Will the CPF OA interest rates be adjusted then? And if yes, will HDB mortgage rates go up?
Will HDB Mortgage Rates Go Up In 2022?
The answer to whether HDB mortgage rates will rise in 2022 is not so straightforward. But with growing interest rates and inflation concerns, some speculate that the HDB mortgage loan interest rate may climb too.
Possibility of Adjusting CPF Interest Rates Due to Inflation
The topic of adjusting CPF interest rates to keep pace with rising inflation has also been brought up in Parliament in August 2022.
The CPF OA interest rate is tied to the three-month average fixed deposit and savings rates of DBS Bank, UOB and OCBC. However, there is a legislated floor rate of 2.5% p.a. – the floor rate is the minimum interest you can be charged on a loan.
Due to this legislated floor rate, the Singapore government has “continued to pay generous interest rates” despite the low interest rate environment. Currently, the three-month average of these three banks’ interest rates is at 0.09%, as per the CPF Board’s latest review.
Rising Bank Interest Rates in 2022
After the spate of recent interest rate hikes by the US Fed, interest rates are now in a new target range of 3% to 3.25%. In response, banks have also adjusted their mortgage rate packages, with UOB and DBS ceasing their fixed rate home loan packages temporarily.
According to our PropertyGuru experts, it is expected that the 3M SORA will enter the 2.7% to 2.8% range by the year’s end. Based on a 0.65% spread in the first year, interest rates are expected to hit 3.35% to 3.4% as 2022 comes to a close.
Considering these two factors, there is a real possibility that the HDB mortgage loan interest rate will be adjusted.
According to the new property cooling measures announced on 29 September 2022, all HDB-granted loans granted will be assessed based on a floor rate of 3%. Based on the same 0.10% spread, this could be an indication that the CPF OA rate may be poised to be increased to 2.90%.
However, the spread between the CPF OA and loan interest rate should remain at 0.10%, mitigating the upside risk on interest rates for those using their CPF funds to service their home loans.
HDB Loan vs Bank Loan in Singapore: Which Should You Choose?
Often, young couples, especially those just starting out their career, go for an HDB loan as it requires less cash upfront; if need be, you can pay for the downpayment using money in your CPF OA. Also, you can finance up to 80% of your flat’s purchase price or flat valuation (whichever is lower).
There are benefits to applying for a bank loan too. Bank mortgage rates change with the market, the offered home loan interest rates can be higher or lower than HDB’s 2.6%. For those with a higher appetite for risk, paying attention to and taking advantage of these fluctuations can mean scoring a package with a more attractive interest rate than that of HDB.
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