An HDB loan vs bank loan is a hard decision – if you do not yet know what you are looking for. You may have heard that HDB has lower interest rates and downpayments, but that may not always be good.
This guide analyses the pros and cons of bank vs HDB loans, helping you make the best decision according to your needs. Here’s how:
We will discuss how an apparent drawback can easily turn into an advantage, depending on your lens. And that lens is your specific situation and your specific needs.
Keep reading below.
HDB Loan Vs Bank Loan
If you are considering anHDB or bank loan, you want to purchase an HDB flat. So, let’s weigh the differences between these financing options with an HDB apartment in mind.
Getting a bank loan for HDB may have fewer eligibility conditions. The bank usually requires a decent credit rating. The HDB imposes stricter requirements, such as income thresholds and citizenship.
Besides, you cannot use an HDB loan to purchase private property.
Minimum And Maximum Sum
A HDB bank loan imposes a minimum borrowing sum of $100,000, whereas the HDB has none. However, the maximum amounts you can borrow with these loans are:
- HDB loan: 80%
- Bank loan: 75%
The downpayment is a major consideration when choosing an HDB loan or bank loan:
- HDB: 20% downpayment, paid in cash, CPF, or both
- Banks: 25% downpayment. 20% out of the original amount can be paid in cash, CPF, or both. 5% of that amount must be cash.
The interest rate for HDB loans is:
- HDB: 2.6% + 0.1% of your CPF Ordinary Account (CPF OA) interest rate
- Banks: 2.7% for floating rates and 3.45% for fixed rates
The HDB loan interest is not the only fee to consider. Early and late repayment charges can add to your loan cost too:
- HDB: No prepayment fee & a negotiable 7.5% p.a. rate for late payments
- Banks:1.5-1.75% early repayment charge & $50 for each late disbursement
HDB loans have just one offer. Bank loans for HDB entail increased flexibility, with several packages. Most offers feature floating rates, but you can also find several options with fixed and hybrid rates. That means banks make it easier to get the right HDB loan for your needs.
The maximum tenure is:
- HDB: 25 years
- Banks:30 years
Pros And Cons
When analysing an HDB loan vs bank loan, you shouldlist their pros and cons. It is even more important to understand how a perceived disadvantage can become an advantage in certain situations, and vice-versa.
HDB loans have lower downpayments because their loan-to-value (LTV) is 80% of your property’s price. That means they can cover up to 80% of your apartment’s value and your downpayment can be as low as 20%.
Besides, you may disburse part of this sum in cash, but you are not obligated to do so.
Conversely, the HDB bank loan downpaymentis 25% out of the apartment’s value and implies paying 5% of your property’s price in cash.
Note: Although the lower downpayment can appear as a pro for HDB, this is not always the case. A higher downpayment now entails having to pay less in the future. Basically, this debt is easier to repay.
Many people, including you, may choose an HDB loan because this financing option can *technically* give you access to more money. But while the maximum bank loan for HDB is lower in theory, that does not mean HDB is obligated to give you a higher LTV.
If you have previous debt or your income is lower, you may not obtain a 80% LTV from HDB. And if that is the case, a bank loan can prove better, especially if you have a higher downpayment and want to become debt-free faster.
That all depends on:
TDSR And MSR
The Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) are essential variables whether you take a bank loan or an HDB loan:
- The TDSR: Represents the amount of monthly loan payments you can have based on your income. This ratio is currently 55%, meaning your installments cannot represent over 55% of your gross monthly income.
- The MSR: Refers to your mortgage loans and is currently 30% of your household’s monthly income. That means a mortgage HDB loan cannot represent over 30% of your household’s earnings.
HDB loans used to have higher interest rates than bank loans, although they are concessionary housing loans. However, rates began to skyrocket in 2022, rising HDB bank rates to 4% and more for fixed-rate packages.
Is the 2.6% rate from HDB better because it is lower?
It can be for now. Bank rates are higher even if you choose a floating rate package. And to keep that low rate low, you would have to continuously refinance your loan. All that entails a lot of hassle and bureaucracy.
Can the 2.6% rate from HDB be worse?
Yes. A lower rate does not make or break your loan because:
- The monthly installments can be similar.
- You may not qualify for an HDB loan if you exceed HDB’s maximum income cap.
- The bank rate can decrease again, getting back to its pre-inflation value.
Let us get back to the first point. Assuming you want to purchase a $400,000 HDB apartment for 20 years and with a 25% advance, the loan you need is $300,000.
- HDB: The 2.6% p.a. rate makes your installment $1,604.
- Banks: A 3.56% (2.46+1.00) rate makes your monthly payment $1,749. But a lower rate of 3.16% (2.46+0.70) can decrease your installment to just $1688.
As you can see, there is little difference between these installments. And if you do not qualify for an HDB loan, there is no need to despair – a bank loan can be similarly affordable.
HDB loans are arguably more user-friendly if you have a tight budget because:
- The fixed 2.6% rate makes it easier to plan your budget for the entire loan duration.
- There is no penalty for paying your loan early.
- The late repayment rate is low and you can easily negotiate it.
To play devil’s advocate, you can infer that:
- Although the 2.6% interest rate is easier to plan for, you can keep bank rates low through refinancing.
- Bank rates can decrease once the global economy settles and inflation drops.
- While the early repayment fee can break the metaphorical bank earlier in your tenure, you already have a 5-year limit within which you cannot sell your HDB apartment. Besides, your apartment’s value may appreciate considerably, so this early payment charge can be negligible.
- The late repayment fee is just $50; you do not have to deal with it if you are diligent with your repayments.
Eligibility Criteria For An HDB Loan And Bank Loan
A bank loan for HDB has few eligibility conditions, apart from a minimu age of 21 and a good credit score. In turn, HDB loan eligibility requirements encompass the following:
At least one of the applicants must be a Singapore citizen.
- You must not have taken more than one other HDB loan.
- You must not have owned a private residence before or a property aquired through inheritance, gifting, or nominees.
- The maximum income is:
- $7,000: Single people
- $14,000: Families
- $21,000: Extended families
- You don’t own or have owned any property in Singapore or abroad during the past 30 months.
Key Considerations For A HDB Loan Vs Bank Loan
As you have seen from this guide, analysing a bank loan vs HDB loan depends on your particular circumstances. Let us review some of these points:
Bank loans have a lower LTV, but that:
- Allows you to become debt-free faster.
- Pay a lower installment if you choose a longer tenure.
- Lower your overall loan costs once the bank rates decrease.
By comparison, a higher LTV from HDB loans allow you to get your dream home now, without saving for a larger advance payment.
Of course, saving for a larger advance down payment has its advantages:
- You have more equity in the property you purchase. That means you may obtain another advantageous mortgage loan in the future if you need one.
- You can negotiate more flexible conditions with the bank or the HDB.
Besides, HDB has stabler interest rates which are very convenient in 2023 compared to bank loans. But that has not always been the case.
Up until 2022, bank rates were more affordable and that can become reality again if the world’s economy gets back on track.
And we have calculated above that even a higher interest rate from a bank can translate into a similar monthly installment.
Luckily, you can always refinance an HDB loan to a bank loan if you change your mind. And Credit21 is always here to help with affordable loan packages, cash advances and more.
Find out more about our solutions here.