If you’re buying a Housing & Development Board (HDB) flat in Singapore, whether it's a BTO flat or a resale flat, you’ll have the choice of taking an HDB loan or a bank loan. This is a huge decision, so don’t make it lightly. Is an HDB or bank loan better? Choosing to take an HDB loan first gives you the option of refinancing to a bank loan later, but unfortunately, once you choose a bank loan, you cannot take an HDB loan anymore.
But that doesn’t mean HDB loans are always better than bank loans.
HDB Loan vs Bank Loan: Mortgage Master Compares
Here’s a Mortgage Master Compares infographic that summarises the pros and cons of each:
| HDB Loan | Bank Loan | |
|---|---|---|
| Loan to Value (LTV) | Borrow up to 90% of purchase price | Borrow up to 75% of purchase price |
| Downpayment | 10% of purchase price or valuation (whichever is lower), can be paid fully from CPF Ordinary Account | At least 25% of purchase price or valuation (whichever is lower), 5% MUST be paid in cash, the remaining 20% in cash or from CPF Ordinary Account |
| Interest Rate | Currently 2.6% | On average 1.6%, but can rise in future |
| Loan Tenure | Up to 25 years | Up to 30 years (but longer tenures have to pay a higher downpayment) |
| Late Payment Charges | 7.5% per year | Around 9.25% per year, depending on the bank |
| Monthly Repayment Amount | Tends to stay the same, since HDB Loan interest rates have remained at 2.6% for years. | May fluctuate several times a year depending the type of home loan package you've taken |
| Lock-In Period | No lock-in period | Lock-in periods are typically 0-3 years. |
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Should you go with an HDB loan?
One of the main benefits of choosing an HDB loan is that you can loan up to 90% of the purchase price from HDB. That means you don’t need to pay more than 10% of the purchase price as a downpayment! What’s more, this 10% downpayment can be paid fully from your CPF savings, which means you don’t need to cough up any cash upfront. This is the main reason why many young Singaporeans choose this option.
Another is the relatively stable interest rate of HDB loans. The HDB loan interest rate is 2.6%, and has been for the past 19 years. There is no indication that it will rise anytime soon. This stability means that your monthly repayment amount does not change.
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Your entire CPF Ordinary Account will be depleted... almost
Yes, HDB can offer you a loan of up to 90% of the purchase price, but that doesn’t mean they’re willing to. In fact, HDB will force you to use up almost all your savings in your CPF Ordinary Account to pay for the house first. In 2018, the rules were changed to allow you to set aside up to $20,000 in your Ordinary Account.
Depleting your CPF Ordinary Account may not be a good thing in the long run. When you eventually sell your HDB flat, you will need to return the amount you used from your CPF Account, as well as the guaranteed interest you would have earned from CPF! That means if your HDB flat didn’t appreciate sufficiently in value when you sold it, you’re essentially making a loss.
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Restrictions when buying a new HDB flat
Imagine you take an HDB loan on your current HDB flat and then, after the Minimum Occupation Period, you want to buy a new HDB flat. Did you know that you must use 50% of the cash proceeds from selling the first HDB flat to pay for the new flat? Not only that, but your CPF will be wiped out as well. As before, this may not be an ideal situation, depending on how much you sell the flat for.
Are bank loans better than HDB loans?
For the past 10 years and beyond, bank loans have had lower interest rates than HDB loans.
This means that if you had gone with a bank loan in the past 10 years, you would almost definitely have paid less than an HDB loan.
Yes, much has been said about the stability of the HDB loan interest rate, but at 2.6%, it is traditionally the higher interest rate.
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Bank loans do not require you to deplete your CPF Ordinary Account
Unlike an HDB loan, you will not need to deplete your CPF savings first before you can get a bank loan. This means that your CPF funds can remain in your Ordinary Account to accumulate the guaranteed interest.
Not only will the interest you earn on your CPF funds be more than the interest you pay the banks, but this also means that you will not need to worry during months when you have lost your income due to a job switch, or illness, or retrenchment. Your monthly repayment can still be paid with the savings in your Ordinary Account.
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No restrictions when buying a new HDB flat
When you sell your current HDB flat to buy a new one, there is no restriction to how much you can cash out from the sale. This means you alone decide how much money to use to paydown the new property.
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Banks are now offering more long-term rates
With the highly competitive nature of home loan rates, banks are now offering longer-term loan packages with the same spread throughout. On a typical home loan package, you may see something like
3M SIBOR + 0.60%.
The “0.60%” is called the spread, or the bank’s profit margin.
Typically, the spread increases by Year 2 or 3 of your loan package. By keeping the spread the same throughout, the bank is basically committing to lowering the cost of the home loan in the long run. It is a great deal and has not been done often in the past.
What should I look out for when taking a bank loan?
Bank loans require you to make a higher downpayment upfront. In July 2018, the government tightened the loan-to-value limits, reducing the amount that a bank can lend to you. Banks can now only loan you up to 75% of the purchase price, which means you need to come up with at least 25% downpayment on your own.
Of this 25%, a minimum of 5% must be in cash. The remaining 20% can be in cash or CPF. Of course, the benefit of this is that your monthly repayment amount is significantly lower than if you took an HDB loan.
Bank loans also come with a lock-in period of 2 to 3 years. During this lock-in period, you will be unable to sell your HDB flat or make partial or full repayment without being heavily penalised. This lock-in period also applies when you refinance your loan to get a lower interest rate.
Of course, if you’re buying a new HDB flat, this lock-in period doesn’t really affect you since the Minimum Occupation Period for new HDB flat purchases is 5 years. This refers to the minimum time you must be living in an HDB flat, whether it's a BTO flat or resale flat.
Ultimately, if you can afford the cash portion of the downpayment, you would want to go with a bank loan as it has lower interest rates compared to an HDB loan.
Choosing BOTH HDB loan AND bank loan
There is a way that you can have the best of both worlds and enjoy the benefits of both an HDB loan and a bank loan. Here's how:
- Apply for an HLE letter when buying your new HDB flat
- Pay off your HDB loan for about 3-6 months
- Refinance to a bank loan
Uh... yeah, that's it. It's that simple. Here are two pros and cons of this option:
PRO: No need to pay your downpayment in cash
By taking up an HDB loan first, you have the advantage of paying your downpayment 100% through CPF alone (if you have enough in your Ordinary Account, of course). This means that you'll get to keep your cash for other needs like your future home renovation or your wedding celebration.
CON: You will probably be paying a bit more in the first few months
When refinancing from an HDB loan to a bank loan, banks want to see the latest 6 months of repayment history to ensure that you have not had any difficulty paying for your home. This also means that the earliest you can refinance to a bank loan is after 6 months.
In those 6 months, you'll likely be paying slightly more. HDB loan interest rates currently are at 2.6% while bank loan interest rates can go as low as 1.1% depending on the package.
If your outstanding loan is $300,000, you will need to pay around $1,300 a month for an HDB loan compared to around $1,150 for a bank loan. Over 6 months, that's a difference of $450.
PRO: You have the flexibility to switch in the future
Who knows what life will be like, months or years later? I mean, anyone who claims to have predicted EVERY twist and turn of 2020 is lying. If your financial situation isn't great when you start making your monthly repayments, being on an HDB loan may be a good thing.
HDB is known to be more forgiving about late repayments, and won't penalise you as much as if you were on a bank loan. Not that we're encouraging you to make late repayments!
Once your financial situation gets better, you can consider refinancing to a bank loan.
CON: Once you refinance to a bank loan, you will not be able to switch back to an HDB loan
Once you go bank, you can never go back. Bank loans are advantageous in many ways, with lower interest rates. However, if you prefer having the option for early repayment without penalty, or the leniance of not being penalised as harshly for late repayment, stick to an HDB loan.
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