Buying a house is an important milestone in almost every Singaporean’s life. I mean we’ve all dreamt of growing up and owning our very own house some day. But when we finally reach that stage in life, we’re like, “wait… now what?”
Deciding how to finance your HDB flat, specifically picking the right housing loan, is a critical step. Especially if you’re a first time home buyer! And sometimes, the noise that comes with an overload of information makes it harder to get the right answers to your questions.
Although an HDB loan might seem like the de facto option (it’s called a HDB loan for a reason…), you may also choose a bank loan to finance your HDB flat.
We know it can often be challenging to weigh the differences between the two… which is why we’ve come up with a detailed analysis to help you decide between a HDB loan or a bank loan!
HDB loan vs bank loan
The HDB loan interest rate is currently pegged at 2.6%. This interest rate is set at 0.1% above the CPF Ordinary Account (OA) interest rate, which doesn’t change much from the current 2.5%, so it’s safe to assume this interest rate will pretty much be constant throughout your loan repayment period. This works well if you’re looking for a more consistent cash flow out of your pocket.
Bank loans typically offer interest rates of 1.3% – 1.7% for the first 3-5 years, with various options of interest rate schemes (typically slightly higher) thereafter.
Already sounds like bank loans are a much better option, right? Well, historically, bank loan interest rates could actually go up to 3-4% per annum – higher than the HDB loan’s interest rate of 2.6%. Currently however the interest rates have been noticeably low at 1.x% since the 2008 financial crisis, and dropped even more this 2020 as a result of Covid-19’s impact on the economy.
At the end of the day bank loans are a risk/return trade-off (the property gods forbid that interest rates start to rise sharply…) and one needs to scrutinize every single facet reaallyyy carefully!
In terms of eligibility, HDB loans can be more restrictive:
- At least one buyer must be a Singapore Citizen
- Your monthly household income must not exceed $14,000 for families, or $7,000 for singles
- You must not own or have disposed of any private residential property in the 30 months before applying for an HDB loan
- You can’t have taken more than 2 previous HDB loans
- Restrictions for owners of commercial/ industrial property
On the other hand, bank loans are less restrictive. Both Singaporeans and non-Singaporeans can apply; from there, the bank will run a credit check to access your eligibility based on factors such as your credit history.
Loan-to-value (LTV) limit and down payment
The LTV limit refers to the maximum amount of loan you can take up when buying a home in Singapore, expressed as a percentage of the purchase price or flat value.
For a HDB loan, the LTV limit is up to 90% of your HDB flat’s value. The remaining 10% must be paid as down payment (cash and/or CPF). For instance, a $400k HDB flat would only require a $40k down payment. Sounds much more attainable already, doesn’t it?
On the flipside, bank loans can cover up to 75% of your HDB flat’s value. The remaining 25% must be paid as down payment (of which at least 5% must be paid in cash, and the other 20% can be in either cash and/or CPF).
So if you were just wondering why people still take up HDB loans despite the comparatively higher interest rate, this is one of the biggest reasons: Many people can afford a 10% down payment much more easily, as compared to having to fork out a minimum of 25% of the purchase price.
There’s no penalty for early repayment of your HDB loan. So in case you strike 4D, feel free to pay off your home loan immediately so you incur lesser interest in total.
Banks, on the other hand, normally charge around a 1.5% penalty for early repayment.
HDB loans are also more lenient and more willing to negotiate when it comes to late repayments whereas banks usually charge heavier penalties than a HDB loan.
Additional tips for first time home buyers
Now that you have a better understanding of the various components involved in getting a home loan, let’s talk about what you should keep in mind when considering whether to take up a HDB loan or a bank loan.
Risk averse vs risk seeking
If you’re someone who’s risk averse, you might prefer a HDB loan as there’s a certain level of risk associated with bank loans. Bank loans offer fixed interest rates for 3-5 years at best, after which, the interest rate could go either way.
That said, HDB loans aren’t necessarily always better. If you’re still confident that bank loan interest rates will continue to stay low, or relatively lower than HDB loan interest rates at least, you might just save yourself a loooot of money you would’ve otherwise paid as interest.
Say for instance you’re planning to take up a $400,000 home loan. With a 2.6% interest rate over a repayment period of 20 years, you would’ve repaid a total of $513,600. (Btw, we skipped the math and used HDB’s monthly instalment calculator)
Now let’s look at how much you could be paying with a bank loan. In an ideal situation, interest rates would remain low. So, say the interest rate is 1.8% for the first 3 years and 2.0% thereafter up till year 20, you would’ve repaid $483,200.
But what if interest rates don’t trend in your favour? Taking a simplified example of 1.8% interest in the first 3 years and a sudden jump to 3.8% thereafter up till year 20, you would’ve repaid $545,500 in total for your $400,000 bank loan – more costly than a HDB loan.
Before committing to your HDB flat purchase, know exactly how much you can loan
We say the maximum amount you can borrow is up to a certain percentage of your HDB flat’s value, but you may not be granted that maximum amount. Other factors such as your age and financial status will also be taken into account.
That’s why it’s super important to make sure you’re able to borrow enough to finance your purchase.
With a HDB loan, you’ll need to obtain a HDB Eligibility Letter (HLE), basically a statement by HDB saying that they’ll lend you that given sum of money to buy your flat. You can apply online via the HDB website, where you’ll be asked for some of your particulars as well as documents to prove your income, such as your payslip or a record of your CPF contribution history.
If you’re going for a bank loan, approach the bank for an Approval-In-Principle (AIP), kind of like the bank’s version of a HLE. This will tell you your potential loan amount (but note that an AIP is not binding, and the actual loan amount might differ slightly after the bank processes your application).
The HLE and AIP is not binding, so if you’ve obtained either and decide not to take up the loan, that’s completely fine!
Maximising CPF housing grants to buy your HDB flat
There are also CPF housing grants available if you’re buying a HDB flat, making it even more affordable.
For example, if you’re applying for a resale HDB flat as a couple, you can get a Family Grant of up to $50,000, an Enhanced CPF Housing Grant (EHG) for Families of up to $80,000, and a Proximity Housing Grant of up to $30,000 – that’s already $160,000 subsidized for your HDB flat purchase!
Refinancing your loan
Refinancing is basically taking another loan to pay off your existing loan. If you refinance your existing loan with one with a lower interest rate, you might save yourself a good sum of money.
Note that if you take up a bank loan, there’s “no turning back” as you can’t refinance a bank loan with a HDB loan; whereas if you start out with a HDB loan, you can then look at bank loan as refinancing options when you’re ready.
Ideally, you should consider refinancing every 3-5 years (or after the lock-in period of your loan), and do so if you get more than a 0.5% reduction in interest rate by switching. There are costs involved when refinancing your loan, such as legal fees and penalties, so if the reduction in interest rate isn’t substantial enough, it might not be worth the move.
Also keep in mind that refinancing is different from repricing your loan (which is when you switch to a different home loan package with the same bank) and the latter might be a faster and less complicated approach.
Planning for the future
Consider your priorities and do some long term planning before you finalise your financing decision. For instance, if you’re a young couple planning to have children in the future, you may want to keep your monthly repayments at a more manageable level, as your monthly expenses would increase once you get a child.
One step closer to homeownership
All in all, here’s a summary of the factors you should be considering when deciding how to finance your HDB flat:
It’s natural to be confused about the process of home buying… After all, it’s going to be one of the most significant commitments in your life. The more informed you are, the more confident you’ll be while making your decision, so feel free to check out our other articles on how to buy a HDB flat in Singapore!
And now that you have a better understanding on how to finance your HDB, start looking for a place to call your own 😉