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 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.
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.
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.
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.
Here are some points to note between the two.
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.
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.
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 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.
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.
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:
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.
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.
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.