HDB loan or Bank loan 2021: Which is cheaper and better to pick?

Your first home is one of the most major investments that you will ever make in your life. So understandably, you want to make sure that you’re making smart decisions and to fully understand how housing loans work in Singapore. This research process can be long-drawn and confusing. 

If you are looking to buy a HDB in Singapore in 2021, a common thought comes to mind, “Should I choose a HDB loan or a bank loan?” The simple answer is, a bank loan for a HDB is generally cheaper and better in the long run.

But, before jumping the gun, it is always important to understand the differences between a HDB loan and a bank loan and then making a decision that best suits your needs. 

The basics: What is a HDB Property?

HDB housing is offered on a temporary leasehold basis of 99 years only. With HDB flats, there are also certain rules and regulations to be followed. One major difference between the two property types is that to buy and own a new HDB flat, one has to be a citizen of Singapore. If not, then they have to at least have permanent residency and must belong to a fixed income bracket.

In Singapore, to own a new HDB flat, one’s monthly income must not exceed $12,000 (or $18,000 for extended families). If one is a foreigner in Singapore, then the most they can do is rent a HDB flat, but they certainly can’t own it unless they are permanent residents of the country. 

Is an executive condominium (EC) considered HDB? 

An executive condominium which has not exceeded 10 years from obtaining the Temporary Occupation Permit (TOP) is considered public housing and therefore in classification is a HDB unit.

On the other hand, an EC which is more than 10 years old after getting it’s TOP is a privatised unit and no longer held under the guise of a HDB property.

Apart from the first timer CPF housing grants which are available for an EC bought directly from developers, bank loans for an EC are also subjected to the same mortgage servicing ratio (MSR) requirements as HDB properties.

In summary, taking into account both the restrictions and financing requirements from banks, a newly launched EC bought directly from a developer can be considered a HDB.

How does a HDB housing loan work?

If you decide to buy a HDB flat, and you are eligible to purchase it, then it is important that you are aware of the HDB concessionary loans, which are provided for Singaporeans. The HDB loans are easier on the pocket since they come with a lower down payment obligation of up to 10% which can also be paid using funds in your CPF Ordinary Account (OA). 

Additionally, interest rates for a HDB loan are more or less fixed currently at 2.60% for the entire tenure of your loan. This in turn takes away the headache of having to monitor interest rates and deal with fluctuating monthly installments. 

However, since there is the  general assurance of consistent interest rates and the lower down payment available, interest rates of HDB loans are higher than interest rates on mortgage loans from banks.

Who is eligible for a HDB loan? 

While a HDB loan does sound attractive particularly to newly married couples because of the low down payment required, there are quite a few rules and regulations that one needs to be mindful of, when applying for a HDB loan:

• When applying for a HDB loan, the buyer cannot have ownership of any private residence either in Singapore, or outside of the country. 
• There is a monthly income ceiling which decides the eligibility for this loan. If a couple wants to take a HDB loan, their monthly income should not exceed $12,000 and for extended families, it is at $18,000.
• Under the Single Singapore Citizen (SSC) Scheme, the income ceiling for a single person is at $6000, when buying a 5-room or smaller resale flat, or 2-room new flat in a non-mature estate.
• If a buyer has already taken two previous HDB loans, then they won’t be eligible for any further HDB loans.
• When applying for a HDB loan, the loan officers check whether or not the buyer has disposed of private residential property in the last 30 months before the loan application. If they have, then their application is rejected. 

How does a HDB bank loan work?

When compared to HDB loans, a bank loan on the other hand is fairly simple to understand. It is a general housing loan that is taken from a bank of the buyer’s choice and based on the bank’s interest rate packages offered; the loan application process and repayment process. 

 A HDB bank loan has two main criterias which need to be met which are specifically the Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR). Both these requirements take into account the income and debt obligations of the borrower and as long as there is a good credit score or repayment history, it is fairly simple to secure a bank loan for your HDB unit.

Monthly installments for a HDB bank loan can be paid via cash or CPF as per desired. You can even choose to pay your entire monthly instalment through CPF as long as there are sufficient funds in your CPF OA.

Major Differences between HDB and Bank Loans

Based on all of the above mentioned points, here is a comparison and list of basic differences between HDB and bank loans:

1. Eligibility- For a HDB loan, there are citizenship and income requirements, plus a bunch of other requirements that decide your eligibility for the loan. On the other hand, for bank loans, if you have a good credit score, low monthly debt obligations and a stable monthly gross income of more than $2,500, you are pretty much eligible for a loan.
2. Monthly Instalment – HDB loans have a much more stable monthly installment considering that the interest rate has much less volatility over a longer period of time. Monthly installments for bank loans are much more unpredictable over  a longer period (more than 3 years) due to either a refinancing or repricing where interest rates and loan tenures can be changed.
3. Down Payment Amount – HDB loans require a down payment of at least 10% of the purchase price of your unit which can be paid in either CPF or cash. Bank loans on the other hand, require a 25% down payment of which, 5% must be paid via cash only.
4. Maximum Loan Amount – HDB loans can be taken up to 90% of the purchase price. For bank loans, the maximum loan quantum is at 75%.
5. Minimum Loan Amount- There is no such mandated minimum loan amount for HDB loans. For bank loans, it is typically $100,000.
6. Penalties – HDB loans do not have a lock in period therefore, there are no penalties applicable apart from a late payment on a HDB loan. For bank loans which have a lock in period the usual penalties ranging from 0.75% to 1.50% of your outstanding loan amount will generally apply if you choose to have an early repayment, refinancing or selling off your HDB within the lock in period.

Historical Interest Rate Trend 2014 to 2021: HDB loan vs Bank loan

The historical interest rates (shown in the chart below) for HDB loans has been around 2.60% for the past 7 years, whereas HDB bank loan rates, specifically looking at the main 3M & 6M SIBOR market rate, has been around 0.50% to 2.00% over the same period.

The reason behind using the SIBOR rates as a benchmark is because banks utilise the SIBOR rates as a benchmark when setting other types of floating and fixed home loan rates as well. Generally, interest rates for bank loans have been lower than HDB.

How do you know if a HDB loan is better for you? 

HDB loans are best if you are:

• Looking to minimise any cash outlay in your down payment
• Might need more forgiving penalties for not paying your loan on time
• Are self employed with unstable income over the past 2 years
• The purchase price of your HDB flat is less than $400,000
• Have a poor credit rating or score due to previous defaults on other loans or credit cards

If the above factors are not on the top of your priority list then you might be more comfortable with a bank loan for your HDB property.

At the end of the day, there is no one-size-fits-all approach to finding the best home loan rates in Singapore — it all depends on your background, income and the property type that you are interested in. For advice on which would work best for your needs, get in touch to speak to a DollarBack Mortgage consultant.