Bank Loan or HDB Loan? We’re Here to Help You Decide

Whether it’s your first home or second, unless you have sufficient spare cash, it’s likely you’ll need some financial help with your new home; especially with the current Singapore residential property market and the recently announced revisions to the Additional Buyer’s Stamp Duty (ABSD) and Loan-to-Value (LTV) limits.

Yet, these aren’t reasons to take up any loan that comes your way. Depending on your financial needs, getting a home loan from a bank could suit you more than an HDB loan. Here are some reasons why:

1. Lower interest rates

The interest rate for an HDB loan is pegged at 0.10% above the prevailing CPF Ordinary Account (OA) interest rate. This is 2.60% p.a. and has steadily maintained at such for over a decade.

In comparison, at the time of writing, taking up a bank loan which is pegged to either a fixed deposit interest rate (such as the POSB HDB Loan or market benchmark rate such as SIBOR (approximately 1.52% p.a^. at the time of writing) could translate into savings in the long run – and you will be able to use these savings to further grow your wealth!

^ Source: Sibor Singapore

2. Broader eligibility criteria

If you fall outside of HDB’s requirements, a bank loan may be just what you need – the process of applying for one is fuss-free too. Aside from having a good credit score, all that’s required of you is to provide your personal and loan details, which can be done online, anytime, anywhere.

However, there’s one important detail that you should keep in mind: If you are currently on a bank loan, you’ll be unable to switch over to an HDB concessionary loan.

3. Higher flexibility with structuring your loan

To sweeten the deal, bank loans often come with attractive benefits ranging from free conversions of your home loan interest rate or legal and valuation fee subsidies to flexible lock-in periods. With these options, financially-savvy homeowners like yourself can pick the loan option that best suits your risk tolerance, essentially allowing you to handle your money with greater flexibility with close to no out-of-pocket costs!

While the advantages of bank loans mentioned above are indeed important, they aren’t the only details that you should be looking out for when ‘shopping’ for one. If you’re a first-time borrower (or someone who needs a quick refresher) or thinking about refinancing your current home loan, it may be useful to take note of the following pointers:

1. Understand the difference between fixed rate and floating rate loans

Most bank loans involve either: a) fixed OR b) floating (or variable) interest rates.

In case you don’t already know the difference, fixed rate loans are usually priced at a premium in exchange for holding rates unchanged over a certain period, after which, a floating rate will be applied. Conversely, the rates for floating packages are usually lower and could adjust according to market changes.

But how does all of this matter?

Answer: You would have to weigh the pros and cons between opting for a lower all-in floating rate that could possibly fluctuate or paying a higher fixed rate in exchange for a peace of mind.

Be sure to pick a loan plan that not only offers optimum interest rates, but also suits your risk tolerance and financial planning goals.

2. Find out the repricing/refinancing options available to you

Is the interest rate you’re currently paying higher than what’s being offered by bank loans? Don’t fret – consider the option to reprice or refinance. However, be sure to check with your bank if there are any applicable fees or charges (e.g. repricing fees, clawback periods, legal fees, lock-in clauses and cancellation fees) before doing so.

Also, some banks do not offer repricing or refinancing when your loan amount falls below $100,000, so don’t forget to ask if there is a minimum loan amount requirement as well!

3. Know what the Total Debt Servicing Ratio (TDSR) means for you

As part of cooling measures for the property market, the Singapore Government introduced the Total Debt Servicing Ratio (TDSR) in 2013, which limits the total sum of your outstanding debts from loans (not just housing, but also student, personal, car etc) to less than 60% of your gross monthly income.

But that’s not all. If you’re looking to purchase a resale HDB flat, or an executive condominium, there’s also the Mortgage Servicing Ratio (MSR) to consider – a measure that limits loan repayments to 30% of a borrower’s gross monthly income. Consequently, taking out a housing loan (whether it’s with a bank or HDB) will require you to meet both TDSR and MSR requirements for your application to be approved.

4. What is the loan duration that you’ll be committing to?

Longer loan tenures generally mean smaller monthly repayments, and vice versa. And this period of repayment (usually up to a maximum of 30 years for most bank loans) varies according to the amount borrowed and the down payment you make.

If you intend to make early repayments to shorten your loan tenure in the future, check with your bank for any conditions involved. You may be charged a penalty fee for early repayment while you are still within a commitment period, and not to forget, be expected to repay a minimum sum as well.

5. Understanding the LTV limit, and how it affects borrowing

In essence, the LTV limit refers to the loan amount you could borrow in relation to its property purchase price or market value (whichever lower). The maximum LTV limit differs depending on factors such as your property type, the number of existing housing loans you currently have and your age etc.

For those who have been keeping up with the news, you should be aware that MAS recently announced a 5% reduction in the LTV limit for all housing loans granted by financial institutions as part of the new cooling measures. For first-time HDB home owners, they are now only able to borrow up to 75%. This means that they might need more time to save for the higher cash and/or CPF funds outlay for their down payment.

However, when you take up a bank loan, you can choose to utilise more of your cash for the down payment and allow your CPF OA savings to grow at 2.50% p.a., as compared to a HDB Concessionary Loan whereby you can only keep up to S$20,000 in your CPF OA (as of 29 August 2018).

It is important to note that there is no change to the LTV limits for refinancing, which still remains at 80% (assuming you have no existing housing loan). This means that it could still be worthwhile to make the switch, when you consider the interest savings that you could enjoy with the lower interest rates offered by the Bank compared to a HDB Loan.

Check out this Home Loan Interest Savings Calculator to get a quick calculation of the savings you could enjoy.

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