Bank loan or HDB loan to buy a home: Which is better?

Bank loan or HDB loan to buy a home: Which is better?

Choosing financing for your home is like a game of "Rathers". You know, where everyone tackles hard questions like "Would you rather be whipped naked down Orchard Road, or rely on the MRT for transport?"

But unlike a game of Rathers, home loan discussions are seldom accompanied by laughter and beer (unless you're awesome). No, picking a home loan is a serious issue. To save you the brain drain, this article contrasts the ole' HDB loan with a fancy bank loan:

What's this HDB loan thing?

HDB concessionary loans are a provision for Singaporeans. The interest rate for a HDB loan is 0.1 per cent above the current CPF rate. As of now (2016), that's 2.6 per cent.

While banks just check your credit, HDB loans have certain restrictions:

- It applies to HDB flats (Duh)

- At least one buyer must be a Singapore citizen

- Buyers' monthly income must not exceed $12,000 (or $18,000 for extended families)

- Buyers must not own any private residence (in Singapore or overseas)

- Buyers must not have taken more than two previous HDB loans

- Buyers have not disposed of private residential property within 30 months before the loan application

- Buyer's monthly income must not exceed $6,000 for singles buying a 5-room or smaller resale flat, or 2-room new flat in a non-mature estate under the Single Singapore Citizen (SSC) Scheme

These are just the most pertinent restrictions. There are others, for people who own and operate commercial properties.

How does it compare to a bank loan?

Depending on the current SIBOR / SOR rates, a bank loan can be better or worse than a HDB loan. Likewise, there are security issues that may appeal to some buyers. In general, a HDB loan is:

1. More forgiving than a bank loan

2. Higher on the interest rate

3. Less intrusive to your cash flow

4. More helpful for the down payment

5. No early repayment penalties

1. More forgiving than a bank loan

This is the biggest appeal of a HDB loan. Bankers have as much compassion as your average rock; fail on your loan repayment, and the frequency of your showers will start to depend on the weather. HDB, on the other hand, will do its best to defer your repayments. Of course, this doesn't mean that you should plan on failing on your payments as this can have other repercussions as well.

2. Higher on the interest rate

As mentioned, the HDB loan rate is 2.6 per cent, and seldom changes. Bank rates are more variable; they're based on current SIBOR and SOR rates, which are usually cheaper. Bank interest rates typically range between 1.6 per cent - 2 per cent (as of March 2016, with the 1-month SIBOR having dropped to 0.79 per cent).

The downside is that the bank's rates are variable. You're guaranteed the same interest rate for three to five years at best (fixed loan package). Beyond that, you're at the mercy of the market. Also, banks have a huge range of different loan packages; If you don't understand how to pick the best one, a HDB loan is a simpler choice.

Otherwise, visit home loan sites like MoneySmart, which will display the interest rates of all the banks offering home loan packages. From there, you'll be able to speak to a mortgage specialist who can actually go into the details of different loan packages to help you make a better decision.

3. Less intrusive to your cash flow

If you need consistency in repayments, HDB loans win hands down. The HDB loan is based on the CPF rate, which changes as often as Justin Bieber makes the news for good behaviour. The best a bank can do is to give you a fixed rate package, which lasts just 2-3 years now.

So if you have a tight budget, pick the HDB loan. You'll know exactly how much to set aside each month. As an added plus, HDB loans come with fewer clauses. You don't need to worry about pre-payment penalties (see point 5), and deferred (late) payments are easier to negotiate. Let's not forget that currently, your employer is also contributing 17 per cent of your gross pay into your CPF. So what you are actually paying with your CPF is less as well.

4. More helpful for the down payment

If you get a bank loan, at least 5 per cent of the initial 20 per cent down payment has to be in cash. You'd best prepare for an amount like $15,000, for even a moderately sized property.

Before giving your patronage to the neighbourhood loan shark, consider a HDB loan. You can use your CPF money (if you have enough) to cover the entire down payment. If you're just cash strapped for that initial 20 per cent, access to your CPF could give you a wider range of property options.

5. No early repayment penalties

If you attempt to pay off a bank loan early, there's a hefty penalty if you are still within the lock-in period. The bank was counting on making money off you via the interest rate, and the minions of Satan the bank never gives up what they're owed.

HDB is more relaxed. If you get a sudden windfall, you can rush your repayment. Remember, the faster you clear your debt, the less interest you end up paying. You might even plan for this; if you're expecting a large cash infusion in 10 years, for example, you can get a HDB loan and plan to settle it quick.

With banks, attempting to pay early lands you a 1.5 per cent prepayment penalty.


A HDB loan is better if you're risk averse, or if there's a chance you can pay off the loan early. It's also useful if your career is just getting started: The down payment on your house is lower, and you have more chances with missed repayments.

But if you understand the housing market well, and you know how to refinance, the bank loan is ultimately cheaper.

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This article first appeared on MoneySmart is Singapore’s leading personal finance portal, and aims to help people maximise their money with powerful tools and engaging content.

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