HDB Loan Vs Bank Loan – Which Is Better For You?
March 12, 2023
A housing loan can help you acquire a home without draining your savings, but choosing the best one is often challenging. Your personal preferences and financial stability will play a role in assisting you in deciding whether a HDB loan or bank loan suits your lifestyle and pocket.
Should you sign up for a HDB loan with a smaller downpayment and higher loan amounts but strict eligibility criteria?
Or should you opt for a bank loan with higher and unstable rates and higher downpayment but more friendly eligibility requirements? From experience, we know these questions aren’t simple but are essential for your success.
In this article, we compare a HDB loan vs bank loan and elaborate on everything you need to answer these questions and choose the right home loan.
HDB Loan Vs Bank Loan
As the name suggests, the Housing and Development Board gives HDB loans to qualified applicants.
On the other hand, you can get a bank loan from traditional banks or any of the hundreds of financial institutions the Monetary Authority of Singapore regulates.
Read on for more about what sets these two housing loans apart.
Contrary to popular opinion, HDB loans are cheaper than bank loans. During the height of the Covid-19 pandemic, bank rates dropped below the current HDB loan’s interest rate of 2.6% per annum, creating the false impression that they are always cheaper.
Bank rates started increasing in 2022, and as of the beginning of February 2023, most banks’ advertised rates were approximately 4% per annum.
The HDB loan interest rate is always pegged at 0.1% above the CPF OA rate. However, bank interest rates vary depending on the situation in the market.
However, sometimes the government can fix bank rates for a short period, typically two-to-three years.
If you choose a HDB loan, you pay a downpayment of 20% of the cost of the property. You can use cash, your CPF Ordinary Account (OA) savings, or a combination of these two methods.
A bank loan is another viable option, but you require a downpayment of 25% of the total cost. You must pay at least 5% of this amount in cash. You can pay the balance in cash or use your CPF savings.
For banks, there is a strict lock-in period, meaning there’s a penalty if you pay off the loan before the expiry of a specified period, usually between two and three years.
The penalty depends on your bank, but it’s usually about 1.5% of the remaining loan amount.
The locked-in period also means you can’t finance your property with a HDB loan once you’ve opted for a bank loan.
Do HDB loans have a lock-in period? For a better understanding of bank loan vs HDB loan, remember that HDB loans have no lock-in period.
So there’s no penalty if you repay your loan early. At the same time, there’s no maximum bank loan for HDB loan repayment. However, if you refinance it with a bank, you might not have another opportunity to secure a HDB loan.
HDB loan repayment amounts are relatively consistent because of their stable interest rates. On the other hand, bank loan rates are often unpredictable.
While you can take out a fixed-rate bank loan to reduce this risk, fixed rates are usually valid for about two to three years.
A HDB loan charges 7.5% per annum for late repayment. For bank loans, the amount depends on your bank. However, HDB is typically more lenient than most banks.
Loan-To-Value (LTV) Ratio
HDB’s LTV ratio is 80%, which means the board can give you up to 80% of the value of the property or the actual selling price, whichever is lower. Bank’s LTV ratio is lower by 5%, meaning they offer up to 75% of the property’s value.
Pros And Cons Of Bank Loan Vs HDB Loan
Let’s look at the cons and cons of bank and HDB loans to give you a clear picture of what we’ve discussed above.
- Interest rates can drop to less than a digit in some instances
- Banks loan can refinance your HDB loan
- Offer flexible eligibility criteria
- Apply to HDB flats and private property
- Unpredictable interest rate
- Early repayment attracts a repayment fee of at least 1.5% of the remaining loan amount
- Higher downpayment of 25%
- Must pay at least 5% of the downpayment in cash
- Lower LTV ratio of 75%
- Stable interest rate of 2.6% (Hasn’t changed since 1999)
- High LTV of 80%
- No early payment penalty
- More lenient late repayment fee
- Applies to HDB flats only
- Offers strict eligibility criteria
- You can’t switch to a HDB mortgage after taking a housing bank loan
Note: Whether you take out a HDB or bank loan, Total Debt Servicing Ration (TDSR) and Mortgage Servicing Ratio (MSR) restrictions will apply.
TDSR And MSR
The Singapore government uses TDSR and MSR to help you borrow what you can afford. Let’s see how these restrictions can affect the outcome of your comparison of HDB loan vs bank loan.
In Dec 2021, the government reduced the TDSR from 60% to 55%. This change implies using up to 55% of your monthly income to service loans is legal.
Effective 30 Sep 2022, the interest rate floor for computing TDSR and MSR also increased by 0.5%.
The medium-term rate has changed for banks from 3.5% to 4%. However, this rate has increased by 5% for non-residential property and mortgage withdrawal loans. However, the rate for HDB loans is 3%.
Note that TDSR affects all your liabilities.
For example, if you earn $10,000 per month, you can spend a maximum of $5,500(55% of 10,000) on servicing your debts.
Assuming you are already spending $5,500 on any of your monthly liabilities. Here, you don’t qualify for a HDB or bank loan, irrespective of whether you are already paying a home loan.
MSR represents the percentage of your monthly income that you can use to service a mortgage. According to this restriction, you can’t spend more than 30% of your monthly income on mortgages.
The changes in the interest floor rates that become effective from 30 Sep 2022 apply here too.
Eligibility Criteria For A HDB Loan And Bank Loan
Whether buying a new or resale HDB flat, you may be eligible for a bank loan and HDB loan. However, you can only consider a bank loan if it’s private property.
Find the eligibility criteria below to help you choose the right loan.
HDB Loan Eligibility
- At least one of you (borrowers) must be a Singaporean.
- Your monthly income should be $14,000 and below (for nuclear families)
- Your monthly income should not exceed $21,000 (for extended families)
- If you are a single buying a five-room or smaller resale flat or a two-room new flat in a non-mature state under the Single Singapore Citizen Scheme, your income shouldn’t exceed $7,000 per month.
- You must not own any private residential property anywhere.
- You must not have sold a private residential property within the last 30 months before the application.
- You must not have taken more than two HDB housing loans before
Bank Home Loan Eligibility
Most people know that the eligibility criteria for bank loans are stringent. While that’s true to some extent, they aren’t as stringent as HDB loans.
Banks are independent financial institutions, so they have unique ways of determining your eligibility. Most banks pay close attention to credit scores since it helps them to ascertain the amount of risk applicants want them to take.
Key Considerations For A HDB Loan Vs Bank Loan
As we finish, let’s summarize the key considerations for a HDB loan vs bank loan.
Banks Do Better in Promoting the Saving Culture
Bank loans cover up to 75% of the property’s value, whereas HDB covers up to 80% of the same. So, banks want you to borrow slightly less, which can help to improve your saving culture.
Bank Loans May Interfere With Cashflow
Since HDB allows you to borrow more than banks, HDB is better if your cash flow is unhealthy.
So it would help to consider whether saving more is better for you or having a significant cashflow before choosing between a bank and HDB loan.
Stable HDB Loan Rates
HDB’s interest rate has been 2.6% since 1999. However, bank rates remain volatile up to date. So, HDB might be a great option if you want to predict the overall cost of your loan and plan well.
Choose HDB Or Bank Loan Depending On Your Needs
Your needs determine the best housing loan that suits you.
If you are eligible, a HDB loan could be the best option due to factors like the stable interest rate and smaller downpayment. Otherwise, banks’ flexible eligibility criteria can also serve you depending on your needs.
If you need more guidance, remember our friendly consultants at Credit Thirthy3 are ready to help you further.