Pros and cons of choosing a bank loan
| Pros of choosing bank loan | Cons of choosing bank loan |
| Lower interest rate: Generally lower than the 2.6% p.a. for HDB loans. | Early repayment penalty: The lock-in period for bank loans restricts you to repay your loan early, and penalty is usually 1.5% of the loan amount. |
| Eligibility criteria is easier to meet: Lower restrictions like the lack of an income ceiling. | Interest rate fluctuates: Interest rates are according to market fluctuations and are inconsistent. |
| Refinance or reprice your home loan: Enjoy the lowest interest rates in the market by refinancing or repricing your home loan | Higher downpayment required: You need to fork out 25% for downpayment, and at least 5% must be paid in cash. |
| Limited refinancing options: You cannot change to an HDB loan during the mortgage period. |
HDB loan vs bank loan: A summary
Now that you have a clearer picture of what the HDB and bank loans entail, here’s a side-by-side comparison of these two housing loan types.
You could also use this handy calculator from CPF to help you estimate the monthly instalment payable on a housing loan.
| HDB loan | Bank loan | |
| Interest rate | 2.6% p.a. | 1.2% - 3% p.a. Depending on market fluctuations |
| Repayment amounts | Consistent due to stable rates | Mostly inconsistent (fixed rates are only valid for two to three years) |
| Loan-to-Value limit (LTV) | 80% (From 30 September 2022 onwards) | 75% |
| Downpayment | 15% (can be fully paid using CPF, cash or combination of both) | 25% (5% must be paid in cash and remaining 20% paid either in cash or CPF, or combination of both) |
| Minimum loan amount | None | Usually at least S$100,000 |
| Borrower eligibility | Stricter (more requirements like income ceiling and citizenship requirements) | Less strict (only requires a good credit score) |
| Property eligibility | HDB flats only | Both HDB flats and private property |
| Early repayment | No penalty | Usually a 1.5% penalty |
| Late repayment | Relatively lenient: 7.5% p.a. late payment fee per year | Less lenient: late payment fee depends on the bank |
| Refinance option | Can switch to bank loan | Can switch between banks, but cannot switch to HDB loan |
What key differences should I take note of?
Here are some key factors that could determine whether you would want to take up an HDB loan or a bank loan.
1. HDB loan down payments are lesser and payable by CPF
Younger couples who do not have tens of thousands of dollars casually sitting in their savings account might want to pay attention to this. If you take up an HDB loan, the downpayment that you’ll have to fork out is significantly lesser at 20% (or even 5% when you sign the lease of agreement, if you are eligible for the staggered downpayment), compared to a hefty 25% if you take up a bank loan.
Aside from that, HDB loans also allow you to pay fully with your CPF funds from your Ordinary Account (OA), which means that you won’t need to take out too much cash from your own pocket. In comparison, bank loans require you to pay at least 5% of the downpayment in cash, which might add up to about S$20,000 for a typical four-room flat. This allows you to have more cash on hand for other costs like renovations and investments.
2. Bank loans come with lower interest rates
You might think that HDB loans come with lower interest rates, but it is actually the other way round. The interest rate for HDB loans stands at 2.6% p.a. currently (just 0.1% higher than your CPF OA interest rate), while bank rates usually fluctuate between 1.2% to 3% p.a.
Though the cap is at 3% p.a., bank loans usually do not go up that high that often. They peg their interest rates to the Singapore Interbank Offered Rate (SIBOR) or fixed deposit home rates, and fluctuate according to market conditions. So if you want to save up on the accumulated interest rate in the long run, bank loans will be the better option.
3. But HDB loans are more stable
As tempting as it is to opt for bank loans because of the lower interest rates, those that need stability in their monthly payments may find HDB loans more appealing.
HDB loans are set at a fixed rate of 2.6% p.a. So while you may accumulate more interest over the years, HDB loans give you peace of mind with consistent repayments, allowing for better budget planning on a monthly basis. On the other hand, the interest rates of bank loans are always fluctuating, while fixed rates are only constant for a few years and not the entire loan. So while you may benefit from a lower interest rate now, the rate may increase in the future unexpectedly.
4. HDB loans have a higher LTV, which means more interest
Young homeowners-to-be may benefit the most from the 80% LTV (subjected to CPF balance) for HDB loans since they most likely would need a larger loan with their lower monthly incomes. But it may not be good in the long run as a higher loan amount will accumulate more interest.
On the other hand, a bank loan covers up to 75% of the purchase price of the house. Though this translates into a higher down payment, the smaller loan size and lower interest rates will result in more savings overall in the long run.
5. There is an early repayment penalty for bank loans
You may think that paying off your loan early will be a win-win for all since you’ll pay less accumulated interest and the bank gets the money, right? Wrong. The bank is actually losing out on revenue from the generated interest for the whole tenure period. This is why there is an early repayment penalty of about 1.5% for bank loans during the lock-in period.
On the other hand, HDB loans do not have any lock-in period, which means that you can always choose to repay your loans early. Whether you have a sudden influx of cash from winning the lottery or want to reduce the total payable interest for the mortgage period, you’re free to repay your HDB loans early without incurring any penalty.
6. Bank loans are less forgiving
If you’re forgetful and often find yourself making late payments, don’t expect the banks to waive your penalty when you make an appeal. They are generally less forgiving when it comes to penalties and fees.
As for HDB loans, they are easier to negotiate with. If you make a late payment, you can make an appeal, which will normally result in a fee waiver or reduction. But of course, if you’re a repeat offender, they probably won’t let you off too many times. Their late payments are usually 7.5% of the amount that is late, and not the full loan.
7. You can refinance only from an HDB loan to a bank loan
If you’re taking up an HDB loan, the good thing about it is that you have the flexibility of refinancing to a bank loan if you ever change your mind because it does not have a lock-in period. But if you’re taking a bank loan, there is no way you can refinance to an HDB loan. You can only either reprice from the same bank or refinance with other banks.
So, should you get an HDB loan or a bank loan?
Those who are not financially strained and have more cash on hand for the downpayment can consider a bank loan. Not only are the interest rates generally a lot lower, but the LTV of 75% will help you free up more savings in the long run because of the smaller loan size. But do be sure to make payments on time to avoid late penalty fees.
If you and your partner are a younger couple who’ve just stepped out into the workforce, chances are you won’t have that much spare cash lying around. HDB loans will be more beneficial as they require a lower down payment of 20% of the purchase price, and you can even pay fully with your CPF! It also has a fixed rate to allow consistent payments, making financial planning a lot easier if you’re working towards a wedding or a car in the near future.
Having come to a decision on which home loan to pick is great – that's the real first key to the keys to your new house! But wait, that isn't the end of the story; as you put the finishing touches with the decor and furnishings, don't forget one last essential: home insurance.
Read these next:
HDB BTO Launches In 2021 (Bukit Batok, Tengah, Kallang – Whampoa, Toa Payoh – Bidadari)
Complete Guide To HDB Grants: How Much Can You Get?
Fixed vs Floating Home Loan Rates: Which One Is Suitable For You?
Home Insurance: Why Is It Important And How Do You Compare The Best Plans?
Newly Weds: Where Can You Stay If Your House Is Not Ready Yet (And How Much Will It Cost)
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