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 2023, a common thought comes to mind, “Should I choose a HDB loan or a housing bank loan?” As interest rates have steadily increased from the start of 2022, in line with the US interest rate hike announcements, HDB loans are now cheaper than bank loans.
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.
HDB housing offers a temporary leasehold basis of 99 years only. With HDB flats, there are rules and regulations to follow. One key difference between HDB and private property types is that you must be a citizen of Singapore to buy and own a new HDB flat. If not, they should at least have permanent residency and must belong to a certain income bracket.
For Singapore Citizens to own a new HDB flat, they must not have a monthly income exceeding $14,000 (or $21,000 for extended families). If you are a foreigner in Singapore, the most you can do is rent an HDB flat. They can’t own it unless they are permanent residents of the country.
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.
If you buy an HDB flat, you must obtain an HDB Loan Eligibility Letter (HLE). A valid HLE confirms your eligibility for an HDB concessionary loan provided by the Housing Development Board. The HDB loans are easier on the pocket since there is a lower downpayment obligation of 20%. You can pay your downpayment using your CPF funds, provided you have enough savings in your Ordinary Account (OA).
Additionally, interest rates for an HDB loan are fixed at 2.60% for the entire loan tenure. It takes away the headache of having to monitor interest rates and deal with fluctuating monthly instalments.
HDB loans come with consistent interest rates and a lower downpayment. For many years, interest rates on HDB loans were higher than interest rates on mortgage loans from banks – but not any more!
While an HDB loan does sound attractive to newly married couples because of the low downpayment required, they have a stricter set of criteria that applicants must adhere to. Here are some pertinent rules and regulations that HDB loan applicants need to be mindful of:
There are other restrictions for people who own and operate commercial properties. You can check out HDB’s official website for a full overview of HDB loan conditions.
Compared to HDB concessionary loans, a bank loan is fairly simple to understand and has fewer restrictions. It is a general housing loan from the bank or financial institution of the buyer’s choice. Bank loans are based on the interest rate packages offered by the bank, the loan application process and the repayment process. They are typically applied after paying the option fee and before exercising the OTP.
An HDB bank loan has two main criteria which you must meet: the Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR). Both these frameworks take into account the income and debt obligations of the borrower and are put in place to ensure people don’t borrow more than they can afford. As long as there is a good credit score or repayment history, securing a bank loan for your HDB unit is fairly simple.
Monthly instalments for an HDB bank loan can be paid via cash or CPF as desired. If you have sufficient funds in your CPF OA, you can pay your entire monthly instalment through CPF.
Based on all of the above mentioned points, here is a comparison and list of differences between HDB and bank loans:
In the current high interest rate climate, when your monthly repayments are higher, don’t expect banks to waive your late payments penalty when you make an appeal. HDB loans, on the other hand, are generally easier to negotiate and more forgiving. Unless you are a repeat offender, HDB may provide a fee waiver or reduction if you make an appeal.
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 from 2014 to 2021.
From early 2022, interest rates have been on the rise, so it is no surprise that homeowners with a floating-rate home loan are getting increasingly anxious about the rising cost of borrowing. In the current high interest rate climate, Singapore homeowners may expect their monthly payments to continue rising, at least for the foreseeable future.
In the last year, the 3M compounded SORA rose by about 3% because of various global events and foreign economic policies. This upward trend brings SORA to roughly 3.6% – 1% higher than the 2.6% interest rate presently offered on HDB loans.
But that has not always been the case. Before 2022, bank rates were comparatively more affordable (as show in the chart) and that can be a reality again if the global economy recovers its stability.
However, it may be prudent to opt for an HDB housing loan in 2023 as it comes with lower interest rates (than current bank interest rates) and more stability in the years of inflation, considering the current inflationary environment.
If you and your partner are a recently employed, young couple, it is likely that you may not have a significant amount of surplus funds readily available. Opting for an HDB loan can prove advantageous in such circumstances, as they necessitate a lower down payment of 20% of the property’s purchase price. Furthermore, you can use your CPF savings to make the payment.
You can also consider refinancing each time your lock-in period ends to maximise savings and enjoy competitive interest rates. In the current situation, you can refinance to a fixed-rate loan package offered by a bank to hedge against potential future rate hikes.
Let’s highlight different scenarios when you should opt for an HDB loan over a bank loan when interest rates are climbing. HDB loans are a more suitable choice if:
If the above factors are not on your priority list, you might be more comfortable with a bank loan for your HDB property.
If your monthly household income exceeds HDB’s maximum income ceiling, you have no choice but to take an HDB bank loan. Additionally, the bank rates are highly variable and may decrease again to reach their pre-inflation levels once the global economy settles and inflation drops.
At the end of the day, there is no one-size-fits-all approach to finding the best mortgage 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.
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