If you don’t have millions of dollars lying around, purchasing an HDB flat could be a good bet.
Buying a house is a huge financial commitment and some of us would like to opt for a home loan. Choosing a home loan is a serious issue, so should you choose an HDB loan or a bank loan? We’ll break it down for you.
HDB Loans are housing loans at a concessionary interest rate — a provision for Singaporeans. The interest rate for an HDB loan is 0.1% above the current CPF rate, making it 2.6% as of 2016.
HDB Loans don’t cater to everyone, there are certain limitations in place.
- At least 1 buyer is a Singapore Citizen
- Applicable for HDB flats only (new or resale)
- Buyer has not taken more than two previous HDB loans
- Buyer does not own any private residential properties
- Buyer has not disposed of any private properties in 30 months prior to applying for HDB Loan Eligibility (HLE) letter
- Total household monthly income does not exceed $12,000 (or $18,000 for extended families)
- Buyer’s monthly income must not exceed $6,000 for singles buying a 5-room or smaller resale flat, or 2-room new flat in a non-mature estate under the Single Singapore Citizen (SSC) Scheme
An HDB loan would allow you to borrow up to 90% of the purchase price or value of the flat, whichever is lower. Before the loan is disbursed, all the money in your CPF account needs to be used up first. HDB will then provide the loan based on the remaining amount you need.
If you bump into a windfall, or through careful saving, you can repay your HDB loan early with zero penalties. In the event where you’re having a financial crisis, an HDB loan would be more lenient to your late repayments, although 7.5% will be charged each year.
A bank loan has lesser restrictions with no income ceiling and no need to empty your CPF account before applying for it.
Unlike HDB loans, interest rates for bank loans are usually pegged to the Singapore Interbank Offered Rate (SIBOR). That means you pay the SIBOR plus a spread (which is the profit the banks make).
Although it is possible to get lower interest rates from the banks, SIBOR is highly volatile and fluctuates based on market conditions whereby CPF interest rates have been fixed at 2.5% since 2000. Also, banks are likely to raise their interest rates after the first three years of the mortgage loan.
Banks are relentless in collecting the money they’re owed, so expect little to no leniency when you’re late on your repayments. You will be charged $50 or more for each late repayment. If you happen to have a pile of cash on hand and wish to repay your loan early within the commitment period, there will be a 1.5-1.75% penalty imposed.
Also, note that a person taking an HDB loan can switch over to a bank loan. However, if you take a bank loan, you cannot switch over to an HDB loan.
So how does an HDB loan compare to a bank loan?
Here’s a simple infographic that can help:
If you’re not a risk-taker or if there’s a possibility of early repayment, HDB loans are a better choice with no fluctuating interest rates. Also, if you’re just starting out, the lower downpayment is helpful and leaves more cash for your other housing costs such as renovation.
But if you’re savvy with the housing market, bank loans are the way to go as you could potentially save more on the interest rates.