Should You Get A Bank Loan For Your HDB Flat?
December 16, 2022
Your first HDB flat purchase can be an exciting milestone, although there is a seemingly endless amount of paperwork to fill up before you can receive your keys.
Securing a mortgage loan is one of the most crucial steps in purchasing a home.
But should you choose a bank loan for HDB flat? What’s the difference between a HDB and bank loan?
We’ll discuss the pros and cons of a bank loan for HDB to help you make an informed decision.
What To Know About A HDB Loan
The Housing & Development Board (HDB) offers low-interest loans to Singaporeans who wish to purchase public housing.
You can buy HDB flats, executive condominiums (ECs), and Design, Build and Sell Scheme flats with a HDB loan.
However, you must adhere to several rules to qualify for a HDB housing loan. The guidelines change depending on the HDB property you’re interested in purchasing and the scheme you choose. We’ll get into that later.
Should You Get A Bank Loan Or HDB Loan?
A HDB loan is the best option if you don’t have much money because the monthly payments are fixed. This means you can budget more accurately for your mortgage payment with a fixed interest rate.
You can switch from a HDB loan to a bank loan if HDB’s interest rate is too high at 2.6%. It’s, however, impossible to change a bank loan to an HDB loan.
Consulting a broker can be useful if you need help deciding between different mortgage options.
Key Differences Between A HDB Loan And Bank Loan
Knowing how the two types of loans differ is helpful when deciding if you should take a bank loan for HDB.
Here are some ways that a bank loan and HDB loan differ.
HDB Loans Let You Pay Your Downpayment Using CPF
You need to make a 20% downpayment to qualify for an HDB loan.
You can use your CPF savings to make a downpayment in full if you have enough money in your CPF Ordinary Account (OA). If not, you can use some of your CPF plus cash.
On the other hand, if you opt for a bank loan, you’ll have to shell out a lot more money upfront.
A 25% down payment is required for a bank loan, with 5% to be paid in cash. Even for a property of average size, you should expect to pay at least $15,000.
HDB Loans Have Higher Interest Rates Than Bank Loans
As previously mentioned, HDB loans have a fixed interest rate of 2.6%. Bank rates fluctuate more frequently because they are tied to cheaper SORA rates.
The average interest rate charged by a bank for a housing loan is between 1-2.05%.
During the lock-in period of a fixed rate bank loan, interest rates may remain stable for two or three years. But after this period, the rates are likely to increase – which means you’ll be at the mercy of the market.
HDB Loans Are Less Intrusive To Your Cashflow
The interest rate and repayment terms of HDB loans are consistent. Bank loans usually offer fixed rates for two to three years.
If you prefer making consistent monthly payments, a HDB loan is your best bet. You can choose fixed or floating rates for bank loans.
But if you’re not good at keeping track of when interest rates rise or fall, you may not want to use a bank loan for HDB.
HDB Loans Have No Early Repayment Penalties
Unlike banks, HDB doesn’t have early prepayment penalties. In general, if you fulfil the eligibility criteria, HDB loans are easier to obtain than bank loans.
An unexpected windfall can help you get out of debt more quickly. Always remember that the sooner your debt is eliminated, the less interest you will pay.
In such an instance, you could pay off your loan early without penalty if you got a HDB loan. That saves you the pain of monthly installments and saves you a lot of money.
But if you did the same with a bank, you would incur a 1.5% prepayment penalty. As they make money from the interest you pay, banks will “punish” you for exiting the repayment plan earlier.
HDB Loans Are More Forgiving Than Bank Loans
This is the most important reason to apply for an HDB loan. If you delay making payment, you can get away more lightly with HDB than a bank.
HDB charges a 7.5% late repayment fee per year. In comparison, bankers are strict with late payments and will charge a $50 late repayment fee per repayment.
While HDB is fairly lenient with regard to late payments, this does not mean you should stop making payments, as it can cause many other issues.
Pros And Cons Of A HDB Loan And Bank Loan
So should you choose a bank or HDB loan? Here are the advantages and disadvantages of each.
Pros Of Getting An HDB Loan
No Lock-In Period
A HDB loan allows you the option of switching to a bank loan, but not vice versa.
So those who get a HDB loan can do a bank refinance instead. They can easily switch to a bank loan without penalty because HDB loans do not have a lock-in period.
Many prefer HDB loans to bank loans due to the slightly lower downpayment required. The minimum downpayment for a HDB loan is 20%, and 25% for a bank loan.
Monthly Payments Are Fixed
Since the payment you make every month is the same, HDB loans are not likely to cause shortfalls in your budget as long as you do not overspend.
Pros Of Getting A Bank Loan
Interest Rates Are Usually Lower
When deciding whether to take a bank loan for HDB, you should consider the expected interest rates.
The high interest rate is one of the main drawbacks of an HDB loan. A 2.6% interest rate could result in higher monthly payments than expected.
Most bank loans offer lower interest rates although they may also increase over time.
Less Stringent Qualification Standards
The hoops you must jump through to qualify for a HDB loan are numerous. For this reason, a bank loan for HDB might be the best option for non-citizens or high-income couples.
Eligibility Criteria For Each
Not everyone qualifies to take either a bank or HDB loan in Singapore. To qualify for the credit, you have to satisfy some requirements.
To Be Eligible For HDB Loan
Here are some of the rules:
- At least one of the buyers needs to be a Singaporean
- The monthly household income of an average family must be less than $14,000. An extended family should not have a monthly household income that is more than $21,000
- You must not have not taken two or more HDB loans
- You must not have owned or disposed of any property within 30 months of applying for the HDB loan eligibility (HLE) letter
- Singles who wish to purchase a resale five-room flat or smaller, or a brand-new two-room flat in a new development must not have a monthly household income of more than $7,000
- Must not own more than one market/hawker stall property or commercial/industrial property. If you own a hawker stall/commercial property, you must be operating a business there and must not have any other source of income
- The loan amount you’ll be granted depends on the extent to which the remaining lease of the flat covers the youngest buyer up to 95 years
To Be Eligible For Bank Loan
You should be able to qualify if:
- You fulfil the annual income criteria
- Your credit score is good
- You did not exceed the Total Debt Servicing Ratio (TDSR) of 55%
Why Do The TDSR And MSR Matter?
All home buyers must comply with the TDSR. The TDSR was lowered from 60% to 55% recently to slow the real estate market.
It means that your monthly payments can’t be more than 55% of your monthly income. This limits the amount you can borrow.
The Mortgage Servicing Ratio applies to HDB properties only, including ECs. It stipulates that your monthly mortgage payments can’t be more than 30% of your monthly income.
You are limited by the MSR when purchasing a HDB property, such as an EC.
Should You Get A Bank Loan For HDB?
A bank loan for HDB is ideal for those just starting in life who don’t have a lot of capital.
Those who prefer to play it safe benefit vastly from an HDB loan because it does not put their finances at great risk.
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