HDB Loan or Bank Loan? A study by ValuePenguin revealed that home loans constitute a staggering 75% of household debt in Singapore. This is followed by motor loans, credit card and personal loans (e.g. education), which is significantly lower at 3.2%, 3.4% and 18.4% respectively. As the largest amount of loan that any Singaporean is likely to take during their lifetime, the idea of purchasing a home is indeed daunting to many. A perennial question that bogs the mind of many soon-to-be homeowners includes deciding between Housing Development Board (HDB) loan or bank loan. One should take note that unlike a bank loan, HDB loans are only applicable for the purchase of HDB flats. Hence, if you are deciding to get a HDB flat and is unsure of the pros and cons of the two aforementioned loans, below we provide some pros and cons for consideration.
Eligibility Criteria Unlike a bank loan, a HDB Loan comes with more eligibility criteria considering that they form the core of Singapore’s public housing for its citizens. Some of the primary criteria include being a Singapore citizen (with at least one co-owner being a local citizen) and having a gross monthly income of not more than $12,000 (or $18,000 for families). Other restrictions imposed include not having ownership of a private residence either locally or overseas, not having disposed of private residential property within 30 months before loan application and not being the third time or more that you are applying for similar loan. In contrast with the eligibility criteria of HDB loans, bank loans are more flexible and it suffices for potential borrowers to have a sound financial background in order to be eligible to apply. Hence, before opting for a HDB loan, make sure to read through its conditions first to confirm your eligibility.
Photo Credit: blog.seedly.sg
Interest Rates Aside from the eligibility criteria which constitutes the basic requirement for any suitable loan arrangements, the second factor that borrowers usually look out for is cost-efficiency. In other words, which loan would be most financially viable. At this instance, HDB loan interest is heftier at 2.6%, which is higher than the current banks’ interest around 1 to 2%. The lower interest rate that Singaporeans get to enjoy for bank loans in the past decade was due to the recent Global Financial Crisis. Several comparisons made by websites like Value Penguin, including Straits Times, pointed out that borrowers can expect to join interest savings of an average $30,000 for their bank loans. This is substantial and worthy for consideration. Although it seems lucrative to jump on board and enjoy the better interest rate offered by banks, it is wise to note that the interest rate for bank loans would increase considerably after 3 years. In contrast, the interest rate of 2.6% for HDB is far more stable and has remained unchanged for more than 15 years. The above are some pros and cons that potential borrowers should consider.
Flexibility and Repayment Earlier we mentioned the eligibility criteria of HDB loan which may imposed several restrictions on potential buyers. Despite these restrictions, there appear to be more inhibitions in terms of managing bank loans as opposed to HDB ones. One evident example would be the fact that borrowers can choose to shift from a HDB loan to a bank loan but not vice-versa. Another restriction comes in the form of repayment. Unlike HDB, there are stricter penalties imposed by banks for both late payment and early payment. For early payment, you can expect to incur a prepayment penalty of 1.5% to 1.75%. The latter charges may end up absorbing all the interest savings you stand to gain from a bank loan. Meanwhile, for late payment, there are stricter penalties imposed by the bank as opposed to HDB i.e. a late payment fee of at least $50 each late repayment. The leniency by HDB loan can be understood in the light that the board was set up to encourage home ownership among Singaporeans. With this said, repayment of HDB loans should not be taken for granted as there are other implications such as the need to sell flat and downgrade.
Cash Flow & Downpayment Another important factor that may influence your decision to opt for HDB loan instead of a bank loan is cashflow. In terms of downpayment, there are more restrictions on the bank loan side as borrowers would be required to pay at least 5% of the initial 20% downpayment in cash. To clarify, the Loan to Value (LTV) ratio for HDB loan is 90%; meaning you can receive a loan of up to 90% for your property price. For the remaining 10%, you would be required to make payment on your own, from which all can be deducted from your CPF. This will be a definite ease on your savings and cashflow. In contrast, the LTV ratio for Bank loan is 80%. Even though you can still use your CPF for the remaining 20%, at least 5% of the 20% downpayment have to be made in cash. Hence, for those who could not afford to compromise on cash flow, HDB loan may be more viable to suit your needs. Additionally, a HDB loan allows you to pace out as it enables a standard payment monthly which is sound and predictable (considering that the 2.6% interest rate is unlikely to differ).
Deliberating – HDB Loan or Bank Loan? Confronted with a difficult choice to make, just be aware that the final decision all boils down to an individual’s preference as well as their financial situation. In a survey done by Seedly, it seems that many heartlanders prefer HDB loan due to its convenience, flexibility and stability. However, this is not to say that bank loans are not favourable. If you have additional cashflow within your means and are looking out for better interest rates and savings, bank loans would serve your needs just well. But just take note to ensure timely payment. Another pointer if you are taking bank loans: The Chief Executive of MoneySmart.sg has advised potential borrowers to obtain an Approval in Principle (AIP) so that you can be better informed and protect yourself during the bank loan process (e.g. bargaining over the price of a home or even if to feel more secure with your deposits). With the above in mind, we wish all soon-to-be homeowners the very best in your house-search and may you secure a loan that best meet your needs. Check out your repayment with the help of HDB Loan Calculator!