80% of Singaporeans and permanent residents (PRs) purchase HDB flats because these apartments are much cheaper than private residences.
Still, a run-of-the-mill 3-room HDB flat costs about $300,000, and you probably don’t have that sort of cash under your mattress. We may still be repaying other loans and might even need a helping hand for that.
Some of you might still be renting a room or a studio apartment in Singapore, incurring more costs in the long run.
But! If you’re planning to buy a house in Singapore, you have to start planning early. In order to make a better budget, let’s find out if a HDB loan or a bank loan is better.
Bank Loan Vs HDB Loan: Monthly Installment
Bank loans have lower monthly installments compared to HDB loans because their interest rates are lower. Thus, bank interest rates average around 1.2% per annum, whereas HDB loans’ interest rates are 2.6% per annum.
So at this point, the obvious question is, why not go with the lowest interest rate.
The problem is you may not be eligible for a bank loan. Alternatively, HDB loans come with many advantages that may be worth paying a higher interest.
If that made you curious, keep reading below.
Bank Loan Vs HDB Loan: Down Payment
The first difference is the maximum loan amount you can get.
When you’re getting a home loan in Singapore, the maximum loan amount you’re eligible for depends on that property’s value. This sum is called the Loan-To-Value (LTV) limit.
Here is where things get interesting:
HDB loans have 15% higher LTV limits compared to bank loans. That means an HDB loan can cover up to 90% of your prospective property’s cost, whereas a bank loan only covers 75% of that property’s price.
Remember that 300k apartment we mentioned in the intro?
A HDB loan will cover $270,000, whereas a bank loan will only cover $225,000.
The problem is that you have to pay a more considerable advance with bank loans compared to HDB loans. So, it’s easier to pay the remaining $30,000 using cash, a personal loan from a licensed moneylender, or your CPF account.
Bank Loan Vs HDB Loan: CPF Down Payment
As we explained in the previous section, the down payment is:
- 10% for HDB loans
- 25% for bank loans
The issue now is how you’re allowed to pay this advance.
And guess what: banks have stricter rules than HDB because HDB is under the governments’ wing, and so is your CPF account. So that means:
- HDB loans allow you to pay your entire advance cost using your CPF account
- Bank loans require a 5% cash advance
Let’s get back to our $300k apartment. If you’re getting an HDB home loan, you’re allowed to pay the entire $30k using your CPF account. By contrast, you’ll have to pay $15,000 out of the total $75,000 advance using cash if you’re considering a bank loan.
Needless to say, that can be difficult if you’re just starting your career and have other expenses to consider, such as a new baby on the way or credit card bills to settle.
Bank Loan Vs HDB Loan: Non-Guaranteed Interest Rates
Bank interest rates vary according to the interbank 3-month SIBOR. So while your HDB interest rate will stay fixed at whatever value you’ve signed up for, the bank’s rate can vary about 1-2% around the first year’s worth.
So, when you draw the line after 20-25 years of paying your loan, you’ll end up with similar annual values for your interest rate.
That brings us to the next point:
Bank Loan Vs HDB Loan: Refinancing/Repricing
If you sign up for a bank loan, the variable interest rate doesn’t prove such a good deal. There’s a solution:
Refinancing or repricing to save more money in the long term.
But refinancing/repricing means an amount of research and bureaucracy that many people aren’t willing to put up with. Here’s what you have to do:
- Every three years or so, you’ll need to analyse different banks’ interest rates.
- Choose the bank with the most convenient/ cheapest rate.
- Calculate the financing cost when you change banks to see if this solution is convenient.
Basically, you’ll have to crunch many numbers to make sure you’re benefiting from that lower bank interest rate.
Banks in Singapore offer home loans of at least $100k. That sum isn’t a problem at first, considering the property price in Singapore.
But, if you continue to refinance/reprice your home constantly, at some point, it will end up valuing less than $100k. When that happens, you’ll have to stick to your current bank, which might cost you in interest if you’re unlucky.
Remember, after getting your house, you will need to begin home renovations. For the best home renovation, you will need a renovation loan to help.
Bank Loan Vs HDB Loan: Pre-Payment Charges
Another disadvantage with bank loans is that you’ll need to pay a fee if you decide to sell your HDB apartment before the lock-in period is over. As a result, this condition puts you at a loss if you’re trying to refinance your flat during that initial three-year period.
This pre-payment charge is also a disadvantage for people who simply don’t like their HDB flats or don’t find them accommodating anymore. For example:
- You may discover you have noisy neighbours
- You change jobs, and your current apartment’s location isn’t convenient anymore
- You find out a new baby is on the way
- An elder relative has to move in with you because they can’t manage on their own any longer
- Your new house’s fengshui is not to your liking
Of course, these examples may continue, and it’s nice to know that HDB loans don’t impose any pre-payment charges.
Bank Loan Vs HDB Loan: Buying Another HDB Apartment
Your HDB loan has a secret advantage not many Singaporeans are aware of:
You can use the HDB Enhanced Contra Facility if you want to buy another HDB apartment. So, let’s say you’ve purchased an HDB apartment and are in one of the situations above: noisy neighbours, job change, or a new baby.
In this case, you’re not planning to make a profit out of selling your HDB flat or refinancing your property. You simply need a better-suited place to live in.
Well, the HDB Enhanced Contra Facility is here to help:
You can sell your current HDB apartment and buy a second one simultaneously with the sale proceeds and the CPF advance that’s returned to you. Thus, you won’t have to wait for the sales proceeds from the original flat to come in.
Basically, this facility is like taking another loan to:
- Move into your new apartment faster
- Minimise any cash loss
Bank Loan Vs HDB Loan: Getting What You Can Afford
As you can see from the sections above, choosing an HDB loan is more advantageous than getting a bank loan even if, when you draw the line at the end of your term, it’s more expensive. However, you have to choose the financing option that makes the most sense to you.
Maybe you’re not planning to have (any more) kids, change jobs or sell your apartment. Perhaps you just want a nice place to live in with your family and pay a lower interest while you’re doing that.
In this case, you may need some help with that initial down payment. Remember that minimum 25% downpayment you have to prepare for and 5% cash advance.
Well, Credit 21 will help you avoid making any compromises because our affordable, fast loan solutions are highly customised. That’s how our convenient installment plans will help you secure an affordable bank loan for the long term.