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Purchasing private property in Singapore: Financing

After deciding where their first home should go, many homeowners are now wondering about the differences between a bank loan and an HDB loan. Are you overwhelmed by all the fine print and jargon? We’ll help you understand the differences between HDB loans, and bank loans.

What are the key points regarding HDB loan vs. bank loan?

  • HDB loans require a lower cash outlay
  • Bank loans have variable interest rates, while HDB loan rates are stable.
  • For about a decade, bank loans were cheaper than HDB loans
  • It is possible to switch between an HDB loan and a bank loan.
  • HDB is more flexible than banks when it comes to late payments

Downpayment

An HDB loan has a huge advantage in that you can pay a lower downpayment.

HDB loans have a maximum loan to-value (LTV), of 85%. You can borrow up to 85% of the flat’s price or value, depending on . You can pay the 15% remaining downpayment with cash or savings from your CPF Ordinary Account.

Bank loans have a maximum LTV ratio of 75%. This means that you will need to pay an additional 10% downpayment.

Additionally, 5% of the downpayment must be made in cash. The remaining 20% can be paid in cash or CPF OA savings.

Monthly instalments and interest rates

The interest rate on HDB loans is 0.1% higher than the CPF rate. The interest rate for HDB loans at 2.5% CPF is 2.6%

Bank loan rates, however, are more volatile, as they can change depending on market conditions. Also, this applies to loan packages with fixed interest rates. These so-called fixed rate home loans have a locked-in period of between two and five years. After that, they are subject to a floating rate.

Regardless of whether you are taking a SIBOR or SORA, BR, FHR home loan, your interest rate will be the prevailing rate plus the spread.

The interest rate of “3M SIBOR + 0.75” is the current three-month SIBOR rates plus the spread (0.75%) charged by banks. The interest rate will change every three months if the SIBOR rate is changed.

If you have a home loan at 1M SIBOR, your monthly loan repayment amount will be different. The loan repayment amount for a 3M SIBOR home loan will change every three to four months.

The interest rate for “BR + 0.5”, is the current board rate minus 0.5% spread by the bank. The bank sets the board rate, but that is the difference.

FHR home loans are tied to fixed deposit rates at the bank. It is very similar to a BR loan, as the bank sets the rate.

Why is bank lending cheaper?

Historical interest rates for bank home loans range from 3% to 4 percent per annum. This is higher than HDB loans.

Bank interest rates have fallen to record lows over the past 10 years, largely due to the 2008 Global Financial Crisis. Bank loans currently average 1.8% per year, compared to HDB’s 2.6%.

Lower monthly instalments are due to lower interest rates.

This is an example

Let’s assume you are buying a flat for S$350,000. Let’s say that the purchase price and the valuation are equal.

An HDB loan has a maximum loan amount of S$297.500 and a LTV of 85%. The downpayment is S$52,500. Monthly repayments for a loan with a term of 25 years will be S$1,349.67.

The loan quantum for a bank loan with a 75% LTV will be S$262,500. The downpayment will be S$87,000.

If you assume a rate of 1.8% annum for a 25-year loan term, your monthly payments will be lower at S$1,087.24.

*Based on typical loan rates at the time of writing. It is not possible to assume that bank interest rates will stay at the same level for 25 years.

To calculate the monthly payments for your home loan, you can also use 99.co’s mortgage calculator.

Income cap

HDB loans are available for purchase of HDB BTO and resale Flat. They have stricter eligibility criteria including the income ceiling. An HDB loan is not available to you if your monthly gross household income exceeds S$14,000

Bank loans, on the other hand, don’t have income caps, so they’re suitable for people with higher incomes.

Tenure

HDB loans have a maximum term of 25 years while bank loans for HDB apartments can be extended up to 30 years. The LTV will be reduced by 55% if the loan term exceeds 25 years, or if the borrower is older than 65.

To learn more about the impact of home loans on loan amounts, please read our LTV limits guide.

A longer tenure is a positive thing as it can lower your monthly payments and spread them out. However, this can also mean paying higher interest.

Refinancing

Refinance your HDB loan to a bank loan, subject to approval by the bank. This is possible even if the original loan had a lower LTV. You can lower your monthly payments by getting a lower interest rate.

You can’t refinance a bank loan into an HDB mortgage. You can refinance your bank loan by either repricing it or switching to another bank.

Late Payments

HDB assesses the annual rate and charges late payment fees for monthly instalments. The rate is 5.5% annually, from 1 January through 31 March 2022.

They are also more flexible and willing to negotiate late payments. This doesn’t mean that you won’t have to pay your home loan. You can still sell the flat or downgrade.

Banks are less willing to minimize their losses.

Early repayment

The HDB loan has another advantage: there is no lock-in period and no early repayment penalty. You can also pay it off sooner to lower the interest and financial burden.

However, it is better to not pay off a bank loan early if you are taking it out. If you cancel your bank loan before the lock-in period ends, the bank will charge a prepayment fee. This is because they earn interest.

HDB Loan vs Bank Loan: Which one is better?

HDB loans are a good option if you have a tight budget. They require less cash upfront. Fixed interest rates give you an idea of the monthly cost of your home loan. If you feel the interest rate is too high, you have the option to refinance your HDB loan to a loan from a bank later.

If you are looking to make a quick upgrade (e.g. If you plan to quickly upgrade (e.g., sell your flat and buy private as soon you can), you might consider a bank loan or a quick refinance into an HDB loan. This will reduce your monthly payments and lower the interest that can be added to your resale profits.

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