Should You Get A Bank Loan For Your HDB Flat?

Dexter Lee November 20, 2022

Should You Get A Bank Loan For Your HDB Flat?

Owning property is a dream for everyone in Singapore. Most people work hard and save enough to be able to own property someday.

But despite this, it can still be challenging to achieve the dream of being a homeowner sometimes. That’s why some may consider taking a loan to get a home that they want.

While preparing for your first home purchase, you should check financing options such as a HDB loan or bank loan.

If you have been wondering whether to take a bank loan for HDB, this is a big decision you should not take for granted. Your financial situation and personal preferences will play a significant role in deciding what will suit your requirements.

Here’s what you should know about choosing a bank loan for HDB flat.

HDB Loan Vs Bank Loan

HDB loans enable you to pay a downpayment with your CPF money. The disadvantage of HDB loans is that they require a minimum downpayment of 20%.

But the advantage is that you can utilise your CPF savings in your Ordinary Account (OA).

On the other hand, a 25% downpayment is required when you take a bank loan, of which 5% needs to be paid in cash. Also, HDB loans have a higher interest rate of 2.6% compared to bank loans.

HDB loan interest rates rarely change because they are pegged to the interest rates of the CPF OA. But a bank loan for HDB secures its interest rate to Singapore Overnight Rate Average (SORA) rates, which change regularly.

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    If you are stuck between a bank loan or HDB loan and don’t like fluctuation, you can choose a HDB loan.

    HDB loans are more forgiving when you are late in making repayments. However, there may be serious ramifications if you fail to repay a bank loan on time.

    What To Know About A HDB Loan

    A HDB loan only applies when you are buying a HDB flat. As HDB is giving out this loan, it won’t work if you are planning to purchase private property.

    This kind of loan needs a smaller cash outlay. In terms of the loan-to-value (LTV) ratio, you can get a maximum of 80% of the purchase price for new flats as of 30 Sep 2022. Resale flats also allow 80% of the value, which is lower.

    This means the HDB bank loan downpayment is 20%, which you can finance using your CPF. The interest rate for a HDB loan is 2.6% per annum in Singapore.

    The loan amount you may be offered for a HDB loan depends on your monthly income, financial situation and age. For a HDB loan, the advantage is that you can refinance it to a bank loan in case you change your mind since it has no lock-in period.

    Should You Get A Bank Loan Or HDB Loan?

    If you are on a fixed budget, you should prioritise getting a HDB loan since it has a smaller cash outlay. Also, its fixed interest rate can clearly show how much you need to pay monthly for your home loan.

    If the interest is too high, you can always refinance from a HDB loan to a bank loan later. However, doing the reverse is impossible.

    If you are considering upgrading – that is, selling your flat and purchasing a private property, you can take a bank loan or switch from a HDB loan to a bank loan.

    By doing so, you will have a reduced monthly repayment and have less interest eating into your resale proceeds. But everyone has different needs and preferences.

    To make the right decision about which loan to take, speak to a licensed money lender. It can assist in breaking down your finances and help you decide which loan is better.

    Key Differences Between A HDB Loan And Bank Loan

    Here are some points to note between the two.

    HDB Allows You To Pay A Downpayment Through CPF

    If you are wondering, should I pay off my HDB loan using CPF? A HDB bank loan requires you to pay a 20% downpayment at the minimum.

    You can utilise your CPF savings to settle the downpayment for a HDB loan as long as you have sufficient savings in your OA.

    You may have to use the available savings in your OA to purchase the flat before HDB approves your housing loan for the remaining amount.

    But if you get a bank loan, you will have to pay more initially. A bank loan requires a 25% initial downpayment, of which 5% has to be in cash.

    HDB Loans Have Higher Interest Rates Than Bank Loans

    As mentioned above, HDB loans have an interest rate of 2.6% and rarely change. Bank interest rates vary based on existing SORA rates.

    However, they usually range between 1-2.05%. The disadvantage is that bank rates are variable. You get a fixed interest rate for two to three years.

    After this, you will be at the mercy of the market rates. Banks also have different loan packages, and if you find it hard to choose the best, a HDB loan is a better option.

    HDB Loans Are More Forgiving

    This is the most important plus point for this kind of loan. Banks have less compassion; you will face penalties for any late repayments.

    But you may get your payment period adjusted when you obtain a HDB loan. However, this doesn’t mean you should fail to pay your HDB loan on time.

    HDB Loans Don’t Affect Your Cashflow

    HDB loans are a better choice as they can offer consistency in repayment. The loan is based on the CPF rate, which changes regularly.

    A bank can at best offer a fixed rate that will stay for two to three years. Therefore, if your budget is tight, pick a HDB loan.

    With this, you will know the exact amounts to pay per month. A HDB loan also has fewer clauses – you don’t need to worry about late repayment penalties.

    No Early Repayment Penalties With HDB Loans

    When you try to make an early repayment for a bank loan, you can get a penalty if you do so within the lock-in period.

    After all, the bank counted on getting profit through interest from your loan, so they won’t relent when you owe them.

    But HDB is more flexible, and you can have a repayment plan when you face payment challenges. Note that the faster you repay your loan, the less interest you will pay.

    But for banks, paying early might cost you a 1.5% prepayment penalty.

    Pros And Cons Of A HDB Loan And Bank Loan

    Pros Of Choosing A HDB Loan

    • It has a smaller downpayment, which can be paid using the CPF OA savings.
    • Unlike bank loans, its interest rate is less likely to change because it is pegged to the CPF OA interest rate.
    • It has flexible repayment options.
    • It does not have a lock-in period.
    • You won’t get penalised for repaying HDB early.

    Cons Of Choosing A HDB Loan

    • High interest rates of 2.6% per year – bank loans are much lower.
    • Higher payable amount. Due to the high interest rates and LTV ratio of HDB loans, you will get a higher accumulated payable amount.

    Pros Of Choosing A Bank Loan

    • Bank loans have lower interest rates than a HDB loan.
    • You can easily meet the bank’s eligibility requirements.
    • You can refinance or reprice your home loan to enjoy the lowest rates in the market.

    Cons Of Choosing A Bank Loan

    • You can be fined for early repayment as banks have a lock-in period that bars you from repaying the loan early.
    • Banks have fluctuating interest rates because they are based on existing market rates.
    • A costly downpayment is required – you have to part with 25% as downpayment and at least 5% in cash.
    • They have few refinancing options.

    Eligibility Criteria

    Before taking a loan for your property, you should check if you meet the requirements. Check the following eligibility criteria for a HDB loan in Singapore:

    • At least one of the buyers should be a Singaporean
    • Monthly income for families should be at least $14,000; or $21,000 for an extended family; and $7,000 for singles purchasing a resale five-room flat or a new two-room flexi flat in a non-mature estate
    • A buyer should not have owned or disposed of private property in the 30 months prior to the loan application date
    • A buyer should not own more than one market or commercial/industrial property. If you own one of these, you must be operating there with no other source of income
    • A buyer should not have taken two or more loans for HDB
    • If a buyer takes one HDB loan, your last owned property cannot be private residential property

    A bank loan’s eligibility is not as strict as an HDB loan. Different banks have various ways of making assessments, but you are likely to be eligible if you have a good credit score.

    Why The TDSR And MSR Matter

    Lenders will assess the maximum bank loan for HDB using the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR).

    The government, not HDB or banks, established these metrics to ensure borrowers do not borrow more than they can afford. Whatever their choices, a homebuyer will be restricted by TDSR.

    The latest property cooling measures in Singapore reduced TDSR from 60% to 55%. Generally, this means what you borrow will be determined by your monthly repayments, which cannot exceed 55% of your monthly income.

    The MSR will also limit you if you buy a HDB property. It states that your monthly repayments for a mortgage should not exceed 30% of your monthly income, which also applies to joint borrowers.

    Make The Best Choice For Your Lifestyle

    The answer to which type of housing loan you should get in Singapore depends on your preferences and lifestyle.

    You can choose a HDB loan if you don’t like to risk it or if you believe you can make repayments early. It can also be beneficial if you have just started your career.

    The downpayment is lower on your home and can get more chances for repayments if you are late in paying. Despite its high interest rate, it won’t affect your cashflow significantly.

    That said, a bank loan for HDB can be cheaper if you are well-acquainted with the current market and know how to refinance your bank loan. However, you should know the terms and conditions because banks are stricter than those of HDB.

    If you are unsure about your decision and need financial assistance, seek help from experts at licensed money lender CreditMaster to get the perfect solution for your housing loan.

    Get help from our friendly loan officers or get started by applying for a loan now. We can quickly process and approve a loan to help you address your needs. 

    Dexter Lee

    Born with a pen in one hand and a keyboard in the other, Dexter's been crafting words into beautiful prose since he was old enough to scribble on his walls (much to his mother's chagrin). He's a self-proclaimed pun master, often leaving his coworkers in stitches with his clever wordplay. He's been known to strike up conversations with strangers and turn their stories into captivating content that keeps readers coming back for more. Despite his unconventional approach to life and work, Dexter takes his job as a content manager very seriously. He knows that every piece of content he produces has the power to make a difference in someone's life, and he's committed to using his words for good.

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