HDB Loan or Bank Loan: Which should you go for when purchasing a HDB Flat

Should I choose a Housing Development Board (HDB) loan or a bank loan? Many first-time homebuyers often face this decision soon after selecting their first home. This guide hopes to simplify the complexities and terminology associated with HDB and bank loans, helping you understand the key differences!

TDLR: HDB Loan vs. Bank Loan

Initial Cash Requirement: HDB loans typically necessitate a lower initial cash payment.

Interest Rate Stability: Bank loan interest rates fluctuate significantly, unlike HDB loan rates which are generally stable (current rate at 2.6%).

Historical Cost Comparison: For around ten years, bank loans were less expensive than HDB loans until banks raised their rates in June 2022 due to U.S. Federal Reserve rate increases.

Flexibility in Transition: It's possible to switch from an HDB loan to a bank loan but not vice versa.

Late Payment Policies: HDB tends to be more forgiving with late payments compared to banks.

Key Differences to note between HDB Loan and Bank Loan

Downpayment

One of the biggest pros of taking a HDB loan is that it allow a lower cash downpayment of 20%. Even though the maximum loan-to-value (LTV) ratio for HDB loans has been reduced from 85% to 80% since September 2022, the downpayment is still lower compared to a bank loan where the maximum LTV ratio is 75%, requiring a slightly higher downpayment of 25%. If you are taking a HDB Loan, the entire 20% can be paid with your CPF Ordinary Account (CPF OA) if you have enough saved up in your CPF. For a Bank loan, a minimum of 5% needs to be paid in Cash.

Interest Rates and Monthly Payments:

The HDB loan rate is fixed at 0.1% above the CPF interest rate, making the HDB Loan rate currently fixed at 2.6% annually. Bank loan rates vary depending on many factors mostly related to the Singapore Interbank Offered Rate (SIBOR), Board Rate (BR), and Fixed Deposit Home Rate (FHR). These rates can change drastically over time due to changes in economic activity, positively or negatively impacting monthly payments.

Historically, Bank interests rates have been above 3% most of the time. During COVID-19, interest rates went as low as 1.15% but due to the recovery in the economy, interest rates went as high as 4.5% in late 2022. It has since stabilised back to around 3% as of late 2023 and early 2024.

When Bank interest rates rise above 2.6%, taking a HDB loan will allow for more affordable monthly payments.

Eligibility Criteria

HDB loans have stricter eligibility criteria, including income ceilings, whereas bank loans do not have such restrictions. To be Eligible for a HDB Loan, your gross monthly household income cannot be more than S$14,000. For extended families, your monthly household income cannot exceed S$21,000. If your household income exceeds the above, you won’t be eligible for an HDB loan. Other eligibility criteria include:
- You are only allowed to take a HDB Loan 2 times in your life
- A minimum of one of the applicants must be Singaporean. PR + PR Households can only take up a bank loan.
- Applicants must not have sold any previously owned private residential properties within the past 30 months
- Applicants are not allowed to own more than 1 hawker stall in the market or more than 1  commercial or industrial property

Loan Tenure

HDB loans are capped at 25 years, while bank loans can extend up to 30 years. It is also important to note that even though banks can extend the loan up to 30 years, the LTV is reduced to 55% if the loan tenure is above 25 years or is longer and crosses the borrower’s 65th birthday. The number of loans you have also affects the loan amount. A Long tenure allowed for potentially lower monthly repayments as the payments are spread out over a longer period. But a longer tenure also means you are paying more  in interest as well.

Refinancing Options

It is important to note that HDB loans can be refinanced into bank loans but not the other way around. Once you have decided to go for a Bank loan, you cannot Gostan (turn back).

Late Payment Consequences

HDB charges as a late payment fee and the rate is reviewed annually. However, HDB's approach to late payments is generally more lenient compared to banks. If you have a valid reason and are in a personal financial pinch, you will usually be able to write in to appeal for a request to negotiate the late fees. Please note that these appeals are only approved on a case by case basis.

Banks however, are a little less forgiving when it comes to late payment fees. If you are unable to pay your loan according the Bank’s schedule, the Bank might move to foreclose your property.

Early Repayment

If you are on a HDB Loan, HDB do not charge a penalty for early repayment. For Banks, most of them charge an early repayment fee. This makes HDB loan slightly more advantageous as this allows you to potentially reduce your interest payable by making early repayments. Most Singaporeans who decide to make early repayments usually do it when they get access to yearly bonuses or come across a windfall! So if you win Toto or 4D or get a extraordinarily high performance bonus that year, you may consider repaying your HDB loan earlier without any penalties!

So… HDB Loan or Bank Loan?

The choice between an HDB loan and a bank loan depends on individual financial situations, risk tolerance, and comfort with variable interest rates. HDB loans are often preferred for their lower upfront costs and stable interest rates, making them ideal for those on a strict budget. Bank loans might be more suitable for those looking to upgrade quickly or take advantage of lower interest rates when available. If you are unsure, speak to a licensed real estate professional so they can help to analyse your situation and provide the more suitable advise for you!

 

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