HDB loans vs. Bank loans

For those who don’t have millions in the bank, there are two main options when it comes to financing your HDB flat: an HDB Concessionary Loan, or a bank loan.

Both come with their own list of advantages and drawbacks but, as with almost anything home loan loan-related, it’s always worth remembering that what suits one person may not work for the next.

To help you avoid borrower’s remorse, here’s a rundown on some of the major aspects worth considering before locking in your final decision.

Sometimes, the choice is not up to you

While taking out a bank loan is dependent on little else besides your capacity to repay it, HDB loans come with a long list of eligibility conditions:

  • • At least one buyer must be a Singaporean citizen.

  • • The average gross monthly household income must fall below $10,000 for families, $15,000 for extended families and $5,000 for singles.

  • • There is a maximum of two HDB concessionary loans per person.

  • • Borrowers must not own any private residential property or have disposed of any within the preceding 30 months.

  • • Buyers must not own more than one hawker stall / commercial / industrial property. If they do own one, the business must be 1) self-operated; and 2) the sole source of income.

On the positive side, it is generally acknowledged that the HDB is more likely to exercise lenience than a bank should you meet with financial difficulties.

Transparency versus potential savings

The interest rate on a HDB Loan is the prevailing Central Provident Fund (CPF) rate plus 0.1 percent.

(The CPF rate, in turn, is based on the average interest rate offered by the major local banks over a three-month period or a minimum of 2.5 percent – whichever is higher.)

The low interest rates of recent years have seen the HDB rate remain steady at its minimum, 2.6 percent, since July 1999.

But while a minimum CPF rate is good news for money going into your savings, it’s not such good news for borrowers during low interest rate periods, when it prevents them from enjoying the sub- 2.6 percent rates offered by banks.

The downside to the cheaper bank rates (during low interest rate environments) is their lack of transparency. While certain types of bank loans are notoriously opaque, even the more-transparent SIBOR-pegged loans include a margin (known as a “spread”) that is determined at the sole discretion of the bank and in almost all cases is (substantially) more than the HDB’s 0.1 percent.

For more on different types of bank loans, see Fixed vs. Floating Rate Mortgages.

Is a greater loan quantum better?

One of the most significant differences between bank loans and HDB loans is the loan quantum, or amount you’re allowed to borrow.

The HDB Concessionary Loan covers up to 90 percent – of the purchase price for new flats, and the lower of either the resale price or market value for resale flats – while bank loans cover only 80 percent.

While there are definite advantages to taking out a smaller loan if you can afford it, there is a big difference between 10 percent and 20 percent for borrowers struggling to save for the initial deposit.

Note also that, for bank loans, the maximum 80 percent loan quantum is only granted if:

          • Only one home loan is held,

          • The loan tenure does not exceed 25 years or beyond the borrower’s 65th birthday.

          • The borrower’s total monthly debt obligations do

            not exceed 60 percent of their income (see Total Debt Servicing Ratio rules).

For more on any of these, see Cooling Measures: An Overview.

For HDB loans, the maximum loan quantum is dependent on:

      • the number of loans held,

      • loan tenure (maximum 65 years minus the shorter of either 25 years or the buyer’s age),

      • the prevailing interest rate, and

      • the repayments not exceeding 30 percent of a borrower’s gross monthly income ( see Mortgage Servicing Ratio rules ).

The maximum loan quantum granted on subsequent HDB loans also factors in any cash proceeds from previous sales.

Help for those struggling to save

Another potential advantage for HDB loan customers is greater access to their CPF savings.

While bank loan customers are required to pay at least five percent of their 20 percent deposit in cash (assuming they qualify for the maximum loan quantum), HDB customers can use CPF savings for their entire 10 percent deposit.

For repayments on new flats, HDB Loan customers have unlimited access to their Ordinary Account.

For repayments on resale flats, they can withdraw up to the Valuation Limit 1  of the flat, and in some cases an additional 20 percent beyond this, provided they meet minimum sum requirements.

However, there are different rules for flats with fewer than 60 years lease remaining, and flats with fewer than 30 years lease cannot use CPF money at all. Further details are on the CPF website.

You get what you pay for… somehow

For borrowers wanting choice, bank loans offer plenty of it, and not just when it comes to choosing from the almost overwhelming number of home loan packages on the market. Most bank loans come with a “honeymoon period” of a few years after which rates increase and it can often pay to search for a different package.

Whereas an HDB loan, once locked in, more or less looks after itself, the “cost” of this opportunity to refinance bank loans is that they require constant attention, or at least attention every few years.

While some customers see taking an active interest in their loan as a small price to pay for the potential savings that can be made by refinancing – especially if interest rates have been falling – others prefer the lower maintenance of the HDB loan.

1Valuation limit  – the lower of purchase price or market value of the flat at the time of purchase.

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Category: Bank loan

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