Weighing your financial options when purchasing a HDB? Here are the key differences between a HDB bank loan and a HDB housing loan.
When gearing up to purchase a property from the Housing & Development Board (HDB), you need to first decide on the best financing option. The decision on whether to opt for a bank loan or a HDB housing loan is a crucial one, as you must review both and select the one that suits your needs.
We know this decision is not straightforward, so we’re here to help you weigh the options. In this article, we give you a rundown of the differences between the loan types.
What is a HDB loan?
An HDB loan is a concessionary loan for Singaporeans by the HDB for the purchase of public properties. With the loan, you can purchase an executive condominium, HDB flat, or Design, Build, and Sell Scheme (DBSS) flat.
To qualify for the HDB loan, you must apply for a HDB Loan Eligibility (HLE) letter. The interest rate is pegged to 0.1% above the Central Provident Fund’s (CPF) Ordinary Account (OA) interest rate, and is currently 2.6%.
As of 30 September 2022, the Loan to Value limit (LTV) is set to 80%.
There are various restrictions that you must adhere to before you can qualify for the HDB housing loan. The restrictions depend on the HDB property you want to purchase and the scheme that suits you. However, here are the main restrictions you should know:
One of the buyers must be a Singaporean citizen.
The buyers’ income should not exceed S$14,000 for families. Extended families should have an annual income of no more than S$21,000.
Buyers should not own a private residence in Singapore or any other country.
You should not have taken two or more HDB loans previously.
Have not disposed of any private property in the last 30 months before applying for the loan.
Singles looking to buy a five-room or smaller resale flat, or a new two-room flat in a non-mature estate, should not have an income of more than S$7,000.
Other important information on HDB loans
The amount of HDB loan you can get depends on the following:
Your credit assessment
The Loan-to-Value (LTV) limit you will qualify for and get
The remaining lease on the flat you want to buy
What is a bank housing loan?
A bank housing loan is the money you get from a financial institution regulated by the Monetary Authority of Singapore to enable you to purchase a property, in this case, a HDB flat. Bank loans usually offer you fixed rates for a set period of a few years, or floating interest rates pegged to the Singapore Interbank Offer Rate (SIBOR), which is the interest rate at which banks borrow from each other or other similar interest rates.
The LTV limit for a loan from a financial institution is 75%. Of the remaining 25%, 5% is to be paid in cash, and 20% can be paid using cash or your CPF.
What is the difference between a bank housing loan and a HDB housing loan?
Now that you have an idea of what you can expect from each option let us look at a HDB loan vs bank loan. In this section, we break down the difference between the financing options and help you choose one that suits your needs.
HDB will let you pay your down payment using CPF
If you opt for a HDB loan, you will need to pay a minimum down payment of 20% of the house's value. The buyer is allowed to pay the down payment from their CPF OA.
However, if you choose to get a bank loan, you will need to pay more for a down payment. Since the maximum LTV for bank loans is 75%, you need to pay a down payment of 25% and 5% of that should be paid in cash.
Before you settle for either loan, assess how you want to pay for the down payment. Are you ready to cough up the 5% in cash? Or would you rather use your CPF savings?
Interest rates for HDB may be higher compared to banks
The current HDB interest rate is 2.6% and rarely changes, while bank rates offer a rate of between 1.2% and 2.2%. Bank loan interest constantly changes, and if you have a fixed-rate loan, that only guarantees you a few years of stability.
Bank loans have a lower interest rate, but it’s important to note that you are at the mercy of the market. In addition, banks offer a wide variety of loan packages with different terms and conditions. Meaning, you must be vigilant when reviewing the conditions. In the long run, you may find that the total cost of a bank loan is higher than a HDB loan.
As of 30 September 2022, HDB loans offer you a higher LTV limit as compared to bank loans: 80% as compared to 75%.
A higher LTV limit makes it easier for first-time property buyers to own property since they most likely have a lower income. However, the other side of the coin is that the higher the loan, the higher the interest it accumulates.
While banks offer a lower LTV, it means you have a lower loan amount to pay, which may translate to less interest. This means you can save more in the long run if you opt for a bank loan.
Paying a bank loan early will earn you a hefty payment penalty if it’s still within the lock-in period. Remember that the bank counts on the interest as its income and any attempt to reduce it will result in a penalty.
On the other hand, with a HDB loan, you can accelerate the payment without expecting any penalty. The faster you pay off your loan, the less interest you pay. That means you get to save in the long run. HDB loans are easier to settle, especially if you are expecting a windfall of cash.
HDB will give you an option to defer the loan in case you have cash flow issues
If you find yourself suffering financial hardship, HDB can allow you to defer or reduce your loan repayments for six months.
On the other hand, financial institutions will not give you an option to defer, and that can affect your creditworthiness. Although no one hopes to get into such a situation, you can consider this when making your decision.
HDB loans give you the consistency you need to plan your cash flow
If you are keen on sticking to your budget, then consider a HDB loan. The interest and repayments of a HDB will rarely change. The best deal you can get from a bank is a fixed-interest rate loan, which lasts for about three years. After that, the interest rate depends on the market conditions.
So, if you are keen on sticking to your budget, opt for the HDB loan. You will know exactly how much you need each month for the loan repayment.
HDB loan gives you flexibility since it does not have a lock-in period
A HDB loan gives you flexibility, and you can convert it to a bank loan since it does have a lock-in period. However, if you opt for a bank loan, you can't refinance it with a HDB loan. The only option available for a bank loan is refinancing from the same bank or other banks.
Which loan should you choose?
The loan you choose depends on your lifestyle and status.
A HDB loan is the best choice if you are just starting out and don't have much income. It has a lower down payment and gives you a chance to defer it in case you have cash flow issues. A HDB loan is best for those who are risk-averse, as you will have access to higher cash flow.
On the other hand, a loan from a bank could be cheaper but requires you to have more cash flow. However, you will need to review the terms and conditions of the loan carefully before you sign on the dotted line.
There you have it; we hope you can make the best financing decision with ease. Should you think that a bank loan is the answer for you, you can compare and apply for the best home loans here.