Applying for an HDB loan is easier and more affordable due to lower down payment requirements. But the total interest payment of bank loans is typically much lower. Which of the two is most ideal for you? You will know once you understand how they differ.
In Singapore, the housing market is the second-highest in the world. Even so, up to 90% of the population lives in their own homes. Such an astonishing rate is possible because of the Housing & Development Board (HDB).
80% of those who own their homes live in public housing – most bought through HDB loans. As an option, buyers may also take out mortgages from banks. Read on to find out which financing scheme is favorable and better fits your needs.
HDB Loan vs Bank Loan
HDB flats are more practical for the majority of homebuyers in Singapore. The purchase price, for one, is lower than private residential properties. More importantly, you may qualify for HDB grants and loans.
As an economic tiger in the global market, there are plenty of banking institutions. Compared to HDB, commercial banks offer home loans with lower interest rates.
At a Glance:
|HDB Loan||Bank Loan|
|Interest Rate||2.6% (fixed)||1.3% to 2.4% (fixed for the first 2 to 5 years)|
|Loan-to-Value limit (LTV)|
90% of the purchase price for new flats
90% of the resale price or market valuation, whichever is lower
|75% of the purchase price|
|Minimum Downpayment||10% (CPF savings or cash)||25% (5% cash + 20% CPF savings or cash)|
Both HDB and bank loans have both advantages and disadvantages. Hence, you need to understand their fundamental differences before choosing one.
How HDB Loans Work
Applying for HDB concessionary loans is generally easier than bank loans. But borrowers can only use the money to buy HDB flats or executive condominiums.
Lower Down Payment. One of the hindrances to buying your home is having enough money to cover the downpayment. At only 10%, you might have enough in your CPF Ordinary Account. Suppose that is the case, then you do not have to use cash.
Can Use CPF OA Savings for Downpayment. HDB has no regulation requiring you to pay cash. On the other hand, bank loans need you to cover at least 5% of the downpayment in cash. That said, you can put any extra money you have for other purposes.
90% Maximum LTV. HDB loans have a loan-to-value limit of up to 90%. It means that you can borrow up to 90% of the HDB flat purchase price. In other words, you only need to pay only 10% downpayment.
Can Refinance from HDB to Bank Loan. Banks have lower interest rates. You can cut down interest payments by refinancing your HDB loan with a bank loan at any time in the future. In most instances, you could save several thousands of dollars.
Higher Interest Rate. HDB loan interest rate, at 2.6%, is significantly higher than bank loan interest rates. Over the long term, the interest payment difference can be several thousand dollars. Such a rate only becomes favorable, although unlikely, if the prevailing market rates exceed the HDB rate.
Higher Monthly Repayments. Higher interest rates mean the monthly payments you make are also higher. But the difference is small month-to-month. Do keep in mind that it can reach thousands of dollars after the tenure.
Income Ceiling on Grants. HDB offers several types of grants. But most of the housing subsidies have a cap on monthly income. If you exceed the limit, you will not be eligible nor take advantage of the subsidies.
How Bank Loans Work
Banks offer two loan interest schemes – fixed rate and variable or floating rate packages.
- Fixed Rates. These packages come with a 1 to 5 years lock-in period in which the rate does not change. After the lock-in period, the rate is pegged to the bank’s board rate, FHR, or SIBOR, depending on your package.
- Floating Rates. As the name implies, the interest rates of these loan packages change depending on market conditions. Generally, they are slightly lower than fixed rates. But the risk is that you may end up paying more if there is a hike on prevailing interest rates.
Lower Interest Rates. Singapore bank rates are much lower than HDB loan rates. The bank may charge less than half of the fixed HDB rate if you have a good credit score. When added up, the difference can be several thousand dollars.
Longer Tenures. Bank housing loans can have a tenure lasting up to 30 years. One could argue that three decades of debt is a long time. But then again, the lower monthly payments are more manageable.
Lower Monthly Repayments. Lower interest rates plus long tenures result in low monthly installments. Over the long term, you are paying higher interest charges. But the lower payments also make buying a home possible for lower-income individuals and families.
Higher Down Payment. For bank loans, the minimum downpayment is 25%. That means you would need to have thousands of dollars of extra cash before applying for a home loan. Even if the interest rates are lower, some people may not have enough cash or CPF OA savings.
Down Payment Requires 5% in Cash. Unlike HDB loans, banks require borrowers to pay at least 5% of the downpayment in cash. Unfortunately, there is no way around this rule. For banks, the ability to put up some cash upfront tells them you can repay the loan.
Early Repayment Penalties. When you earn more money, it makes sense to cut down the principal and lower your interest payments. But banks have an early repayment penalty of 1.5% or more, which reduces your potential savings.
Cannot Refinance from Bank to HDB Loan. Once you are eligible to take out a bank housing loan, refinancing is a good idea. The reason is simple. Bank rates are lower, which means you pay less.
HDB Loan vs Bank Loan Comparison
Besides interest rates and the amount of downpayment required, how else do HDB and bank loans differ?
At least one of the buyers must be a Singaporean citizen
Foreign citizens may be eligible, depending on the bank
Monthly Repayment Amount
Fixed for the initial 2 to 5 years, after which, the monthly payment amount changes in accordance with prevailing interest rates
Up to 25 years or until the youngest borrower reaches age 65, whichever is lower
75% loan amount: up to 30 years or until the youngest borrower reaches age 75, whichever is lower
55% loan amount: up to 25 years or until the youngest borrower reaches age 75, whichever is lower
Minimum Loan Amount
Early Repayment Fee
1.5% or more, depending on the bank
Late Payment Fee
7.5% per annum
S$50 per repayment, depending on the bank
Can switch to bank loan
Cannot switch to HDB loan
Can take on top of an HDB loan
Can take on top of a bank loan
HDB Loan vs Bank Loan: 7 Key Differences
1. Citizenship Criteria
There is no hindrance for Singaporean citizens when buying a home. However, the same cannot be said for non-residents. For foreigners who need a mortgage, the best option is to go to a bank.
2. Type of Property
An HDB loan lets you buy a new or resale flat or an executive condominium but not private property.
If you plan to buy a private residential property, your choice is to apply for a bank loan.
3. Monthly Repayment Amount
A fixed monthly loan repayment amount makes it easy to track your expenses. With bank loan packages, many of them have a lock-in period. Once that expires, the new interest rate will most likely change.
Most likely, the change should not be a problem. Even if there is a hike, the probability of bank interest rates exceeding the HDB rate is low.
At any rate, expect some adjustments regardless if you took a home loan with a variable or fixed interest rate.
4. Loan Tenure
Ordinarily, the difference in loan tenure is not a concern. As a general rule, you want the shortest term. This way, you do not have to pay more interest than is necessary. At the same time, you could get rid of one debt faster.
But if your monthly income is not that much, then you have to consider other expenses. After all, the goal is to have extra money for savings still each month.
HDB concessionary loans have a loan tenure of up to 25 years. In this regard, banks offer a degree of flexibility, allowing up to 30 years.
5. Early Repayment Penalty
What should you do if your monthly income increases? The best thing to do is to reduce your debts. That means paying more towards the loan quantum or principal. With HDB loans, there is no prepayment penalty.
Bank loans, on the other hand, usually have a 1.5% penalty. Hence, before deciding to prepay the principal, you need to compare how much you are saving vs the penalty amount. You do this to ensure that you are not ending up on the losing end – paying more in penalty than the savings.
6. Late Payment Penalty
After figuring out your financial capability, you should feel confident about your ability to repay the loan. But things happen – the pandemic is an example. For many people, this scourge has negatively affected their income.
Apart from reduced income, there are plenty of other reasons that could cause a delay in payments. Being burdened by an emergency, for example, is one.
At any rate, the late payment fee is one difference you need to consider.
For an HDB loan, the fee is 7.5% per annum. Meanwhile, the usual bank fee is S$50 per late payment. Between the two, HDB usually costs less than banks.
By and large, the total amount you pay is less with a bank loan than with an HDB loan. But the initial expense of taking out a loan is much more affordable with HDB loans – lower downpayment which you can cover exclusively with your CPF OA savings.
Granted that you already have taken out an HDB loan, you can always refinance it with a bank loan.
Switching from a bank loan to an HDB loan, on the other hand, is not possible. Then again, why would you do that if bank loan interest rates are much lower than HDB loans?
One thing you can do with a bank loan is to compare interest rates with other banks. You may refinance if there is another bank offering a lower rate. But if other banks have the same interest rate, you might as well consider refinancing later.
How to Choose Between an HDB Housing Loan or Bank Home Loan
Choosing between taking out an HDB loan or a bank loan is easy. Once you have decided to own your private residence, consider these four steps:
Check Your Ability to Pay the Downpayment
Remember that HDB loans need only a 10% downpayment. If this amount is already near the most you can afford, there is no need to think about bank loans. But if you can afford the 25% downpayment, including the 5% cash outlay, you should also consider a bank loan.
Consider the Total Interest Payment
The second step is a little tricky. That is because the total interest you pay is affected by the loan tenure. In turn, it affects the monthly repayment amount.
Another factor to consider is this:
- HDB loans are simple because there is only one computation
- Banks offer both fixed and floating rate packages
Each of the leading banks in Singapore offers several types of home loan packages. Hence, it can be confusing and perplexing.
Sample Computation of Total Interest Payment
- Loan Amount: S$300,000
- Loan Tenure: 20 years
- HDB Interest Rate: 2.6% per annum
- Bank Interest Rate: 1.3% per annum
Total Interest Payment
Note: The above computation is too simplistic. This example is only to illustrate that the total interest with bank loans is lower than HDB loans.
MSR and TDSR
Here are two terms that you should be familiar with about your personal finance.
- Mortgage Servicing Ratio (MSR). This term refers to the part of monthly income that goes towards repaying all property loans. The MSR has a 30% cap and includes new loan applications. Also, the MSR is only applicable for loans intended to buy HDB flats and executive condominiums.
- Total Debt Servicing Ratio (TDSR). This term refers to the part of your monthly income used to pay off debt obligations. Like MSR, the TDSR also includes the new loan you are applying for and has a 60% cap.
When your gross monthly income changes, and hopefully for the better, pay attention to MSR or TDSR. As long as you keep your debt payments within limits, you should be able to grow your savings and emergency funds.
Monthly Repayment Amount
You can determine the most suitable loan tenure by deciding how much you can afford to pay each month. That is why you should know your MSR or TDSR, whichever is applicable.
As long as you do not breach the cap, pick a repayment schedule closest to the most you can afford. This method lets you determine the shortest term to keep the total interest payment down.
Get the Banks to Do the Math for You
Banks are more than willing to help you choose the most suitable loan package. You can always ask them to provide sample computations based on the monthly amount you can pay. There is no better way to compare than having the loan repayment schedule in your hand.
Keep in mind that you should not only focus on banks that offer the lowest interest rate on the market. A specific bank, for instance, may have the lowest rate in the country. But they may be charging you more on other fees.
At the very least, you should try to compare up to three banks.
Make the Decision
In most cases, the total interest payment with bank loans is lower than HDB loans. Just for this factor alone, it is better to get a mortgage from a bank. Again, that is assuming borrowing from a bank is a feasible option for you.
By now, you already have a better understanding of the differences between HDB and bank loans. Remember to keep these things in mind:
- It is easier to apply for HDB loans.
- HDB loan downpayment is more affordable.
- In most cases, you pay less interest on bank loans.
- It is better to choose a bank loan as long as you can afford the downpayment.
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