An HDB home loan is probably the largest loan you’ll ever sign up for. Here’s how it works.
HDB Concessionary Loans are the first kind of housing loans most Singaporeans encounter. While they are more straightforward than bank loans, getting one is still a nerve-wracking experience; it could be the biggest loan you’ll ever take. Don’t stress out, here’s a simple summary of how it works.
What is a HDB Concessionary Loan?
A HDB loan is used to purchase your HDB flat. Unlike a private bank loan (which has to be used for private properties), a HDB loan can finance up to 90% of your flat’s valuation or price (whichever is higher).
So if you are getting a S$300,000 flat, a HDB loan can finance up to S$270,000 of the flat price. The remaining 10% (S$30,000 in this case) can come from a combination of cash, or your CPF Ordinary Account (CPF OA).
This means that yes, it is possible for to buy a flat without paying anything from your wallet; but only if your CPF OA is sufficient to cover the full down payment.
What is the Interest Rate?
The interest rate for a HDB loan is often considered to be fixed; this is semi-correct. Technically, the interest rate on a HDB loan is pegged at 0.1% above the prevailing CPF OA interest rate (2.5%).
As such, the HDB loan rate at present is 2.6% per annum.
Now the CPF OA rate is revised quarterly, so in theory this is a fluctuating rate. However, most people would consider the HDB rate to be “fixed” on the basis that it rarely changes – the interest rate has remained at 2.6% for several decades now.
This makes your HDB loan one of the cheapest debts you can acquire. A personal loan is generally in the realm of 3% to 9% interest per annum.
What is the Maximum Loan Tenure?
The maximum loan tenure (time to pay off the loan) is either 25 years, or 65 years minus the borrower’s age; so if you are 40 years old when taking the loan, the maximum loan tenure is 20 years instead of 25.
If two or more people are borrowers, such as you and your spouse, the average of your ages will be used.
How Do You Make Monthly Payments for Your HDB Loan?
You can pay for it via your CPF, or pay for it in cash. Most Singaporeans prefer to use their CPF. However, if you want the guaranteed interest rates for your CPF account, you might choose to pay in cash and leave your CPF untouched.
How Do You Qualify for a HDB Loan?
To obtain a HDB loan, you must meet the following requirements:
- You must be buying a HDB property (but note that you cannot use HDB loans to purchase Executive Condominiums)
- You are a Singapore citizen aged 21 years or older
- You must not have taken more than 2 HDB loans in the past
- You must not currently own a private property, or have owned and sold off a private property within the past 30 months
- You must not own more than one commercial property (such as a warehouse or restaurant outlet). If you do own one of these, you must be operating it as a business (i.e. It is not let out to a tenant), and you must have no other source of income.
- Your total household income does not exceed S$12,000 per month for families, S$18,000 per month for extended families, or S$6,000 per month for singles.
- If you are purchasing a resale flat, the flat in question must have 60 years or more remaining on the lease. However, HDB does make some exceptions for this, so do contact them to explain your situation.
What is the Mortgage Servicing Ratio of the HDB Loan?
The HDB loan has a Mortgage Servicing Ratio (MSR) of 30%. That means your monthly repayments cannot exceed 30% of your monthly income. If you are earning S$2,000 per month, for example, your monthly repayments cannot exceed S$600 per month.
If you have variable income (e.g. You earn based on commissions, or run your own business), the MSR will be based on your average monthly income, minus a 30% margin. So if you usually make S$6,000 a month working on commissions, your monthly income will count as being S$4,200.
Can You Speed Up Repayment?
Yes, unlike a bank loan there is no prepayment penalties on HDB loans. You can voluntarily pay more in order to speed up repayment. However, this is not as simple and clear cut as being able to avoid more interest.
Paying your home loan early is not the same as paying your credit card debt early! It may be financially imprudent to rush home loan repayments, as you could end up with insufficient savings to cope with emergencies. Also, you may be unnecessarily depriving yourself of returns to bolster your retirement. Speak to a financial advisor before doing this.
When Must You Get the Loan?
You must obtain a HDB Loan Elegibility (HLE) letter before buying applying for a new flat. For resale flats, you must get the HLE letter before signing the Option to Purchase. The HLE is basically a statement by HDB saying they will lend you a given sum of money, as and when you choose to buy a flat.
Note that you cannot buy a flat without the HLE, as there is no guarantee you can get the loan to pay for it.
The HLE letter is valid for 6 months. If you want to buy a house after that, you will need to apply for another HLE letter.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.