Looking to buy a HDB in Singapore with either a HDB Loan or Bank Loan but not sure if you meet the eligibility conditions, or simply having difficulty making choices to pick the best loan package for yourself? Fret not, because we are here to help with what you must know to buy your first HDB in Singapore. Essentially, a wise decision will help you reduce potentially significant interest payments, lower intrusiveness to your future cash flows and meet the monthly obligations. Associated risks of foreclosure, repossession, bankruptcy, etc will also be diminished. Let’s compare the HDB Loan with commercial bank loans and consider the following aspects:
1. HDB Loan Or Bank Loan – Your Loan Amount
All home loans, regardless of whether it is for an HDB unit or private property, need to fulfil the 60% Total Debt Servicing Ratio (TDSR) requirement. This means that when your total monthly debt obligations — i.e. credit card balance(s), student loan(s), car loan(s), personal loan(s), credit term installment plans with retailers, etc — when divided by your gross monthly salary, has to be less than 60%. In other words, if you earn a fixed income of $5,000/month, your housing loan repayments plus outstanding debts, cannot exceed $3,000.
In addition to TDSR, home loans for HDB flats and Executive Condominiums (ECs) are limited by the Mortgage Servicing Ratio (MSR) of 30% as well. Instead of using the Monthly Total Debt Obligations whereby credit card loan etc is also included in the computation, here, we only take into account the Monthly Total Mortgage Repayment i.e. how much you spend on mortgage repayment every month.
2. HDB Loan Or Bank Loan – Your Loan Tenure
In the case of bank loans, the maximum loan tenure is either 30 years, or 75 years minus the borrower’s age. A longer loan tenure helps to reduce monthly repayments and improve cash flow.
3. HDB Loan Or Bank Loan – Interest Rate
Contrary to popular belief, the HDB Loan’s interest rate is not fixed at 2.6% per annum, though this is still the current rate. Technically, the HDB Loan’s interest rate is pegged to the prevailing CPF Ordinary Account (OA)’s interest rate by a 0.1% margin. This implies that there is a possibility that HDB will change its loan’s interest rate should market conditions alter, such as in the 1st half of 1999 when CPF OA’s interest rate rose to 4.41%.
On the other hand, the current floating interest rate for bank loans ranges from 1% to 1.38% and fixed interest rate from 1.68% to 2%.
4. HDB Loan Or Bank Loan – Downpayment
As opposed to HDB loan, bank loans are usually only able to finance up to 80% of the purchase price of the property. This means forking out more money upfront for the purchase.
5. HDB Loan Or Bank Loan – Lock-in Period
The HDB Loan has no restrictions while commercial bank loans have a lock-in period of between 1-5 years once you take up the loan, depending on the loan package you have opted for. During the lock-in period, your loan cannot be paid off earlier than scheduled without incurring penalties.
6. HDB Loan Or Bank Loan – CPF OA Balance
For the HDB Loan, upon Temporary Occupation Permit (TOP) and during the collection of keys to your new home, HDB will wipe out your CPF OA balance to reduce the loan quantum required for you to service.
In contrast, bank loans provide you with the flexibility to retain CPF savings, as long as you fulfil the cash down requisites. The amount of CPF savings you can use depends on the type of property and loan you are taking.
HDB Loan Or Bank Loan – Conclusion
The type of loan depends on individual circumstances! For example, if you are cash tight and prefer not to spend too much cash on the down payment, then HDB Loan might be a better option. On the other hand, if you consider yourself to be more cost-sensitive and wish to have control over the total amount of interest you will be paying, then consider taking up a bank loan.
Alternatively, you can also first take up the HDB Loan and make some of your loan repayments with CPF, and subsequently, switch to a bank loan when you are more comfortable to service the monthly mortgage payment with cash. However, once you have converted your housing loan from the HDB Loan to a bank loan, the process is irreversible and you will not be able to obtain another loan from HDB. You should also take into considerations of your home decor accessories needs as well.
The team at Redbrick Mortgage Advisory has more than 60 years of banking experience and is proficient in structuring and sourcing for the best financing terms for both residential and commercial real estate in Singapore, Malaysia, USA, UK, Japan, Thailand and Australia.