Should you change your HDB loan to a bank loan?

Like many Singaporeans, you took up a HDB concessionary loan when you first bought a house years ago. To commemorate the last day of your debt-free life, you may or may not have gone for a celebratory stroll at the free-to-enter Toa Payoh Town Park.

Fast-forward many years, and you now enjoy a higher income. To take advantage of the current low-interest environment, you are tempted to refinance your mortgage with a bank for better savings.

At PropertyGuru’s Mortgage Marketplace, you can find a wide selection of mortgage loans from over 14 major banks – so it’s easier to choose a refinancing package that best meets your needs.

Before you proceed with refinancing your HDB loan, here are some points for you to consider:

Sir Stamford Raffles’ statue hasn’t moved an inch in the last ten years – neither has HDB’s interest rate.

Most people who take up a HDB loan choose it for the stable interest rate. Pegged at 0.1 per cent above the prevailing CPF interest rate, it has held constant at 2.60 per cent per annum.

This gives homeowners like yourself greater peace of mind, since you don’t have to worry about fluctuating interest rates affecting your monthly mortgage payment. If there are young children and elderly parents in your family, you’ll appreciate the stability that comes with a HDB loan.

However, the drawback is that HDB interest tends to lag behind market developments. If interest rates go down significantly – as they did to historically low levels last year – you could end up paying more than if you had taken up a bank loan.

This almost sounds ominous, but bear in mind that you can’t switch back to a HDB loan ever again after you refinance. Once you take up a bank loan, you’re basically on your own.

So before you commit to anything, it might be a good idea to check out all the housing loan packages offered by major banks at Mortgage Marketplace.

As Singapore’s public housing authority, and a statutory board under the Ministry of National Development, HDB tends to show greater leniency to homeowners who fall on hard times and default on their home loan. For genuine cases, you’d not expect HDB to foreclose on a property.

We’re sure your average cuddly, big-hearted bank doesn’t have a heart of stone and ice in its veins. But as a financial institution, you’d expect it to try to recover any bad debt. Even if that results in someone sleeping on a park bench from time to time.

We’ve all dreamt of winning the lottery. Let’s suppose you happened to be that lucky 1 out of 13,983,816 punters to win the top prize, and like a responsible homeowner, you can’t wait to pay up the remainder of your home loan immediately.

At HDB, your early repayment will be accepted gladly with no questions asked. On the other hand, if you tried to repay your bank loan fully before the loan term is up, you’ll find yourself slapped with a 1.5 per cent prepayment penalty. But hey, that would be like spare change if you really did win a windfall.

At this point, if you can still continue reading without covering your eyes, you’re probably comfortable with the idea of taking a bank loan.

To help ease your cash flow, banks offer a variety of repayment choices. The three most common types are fixed-rate loans, variable interest loans, and loans with interest rates pegged to SIBOR.

Let’s take a more detailed look at each type of loan.

With a fixed-rate loan, your monthly installment is locked for an agreed period of time – usually for the first one or two years of your loan to protect you from rate fluctuations.

At the end of the fixed rate period, the interest rates will be based on the bank’s board rate (i.e. rates set internally by the bank). Some banks offer a discount on the board rate, so don’t be shy to negotiate for a better rate.

For loans with variable interest rates, you can expect to pay lower interest. However, the interest tends to fluctuate with the bank’s board rate, so there is a degree of uncertainty on how much you can expect to pay from month to month.

There is also a lock-in period – usually one to three years – to discourage you from refinancing your loan during that time. Should you switch banks before the lock-in period is up, you’ll be subject to a penalty fee.

The interest rates for this type of loan are pegged to the Singapore Interbank Offered Rate (SIBOR). The SIBOR is reviewed every three months, and has varied between 3.5 to 0.6 per cent in the last five years. For their offered rate, banks usually add on a fixed percentage to the SIBOR.

Due to the current low SIBOR, this type of loan probably offers you the lowest mortgage payment every month. Just be mindful that your mortgage is likely to increase if the SIBOR rises significantly.

Read more about loan and interest rates here.

By refinancing your HDB concessionary loan with a bank loan, you could benefit from prevailing low interest rates and save a few hundred dollars every month.

While a HDB loan is the standout choice if you value stability, there are smart savings to be made in the short to medium term if you opt to take up a bank loan.

For the best selection of home loan packages in Singapore, visit PropertyGuru’s Mortgage Marketplace.