HDB loan vs bank loan: Which is better? 5 things to know before you commit

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 in Singapore is a serious issue. To save you the brain drain, this article contrasts the good old HDB loan with a bank loan:

What’s this HDB loan thing?

HDB concessionary loans are a provision for Singaporeans. Currently, the interest rate for an HDB loan is 2.6 per cent. HDB loans have certain restrictions:

• It applies to HDB flats
• At least one buyer must be a Singapore citizen
• Buyers’ monthly income must not exceed $14,000 (or $21,000 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 $7,000 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 other restrictions for people who own and operate commercial properties.

HDB loan vs bank loan

A bank loan typically has less restrictions than an HDB loan – the bank mostly wants to run a credit check and that’s about all.

Bank loan interest rates fluctuate, so depending on the current SIBOR/SOR rates, a bank loan can be better or worse than HDB loan‘s 2.6 per cent. It’s usually better.

There are also a few other major differences between them, summed up in this handy table:

In a nutshell…

• HDB loans have a higher interest rate, but it’s fixed
• Bank loans have lower interest rates, but they are only valid for up to two to three years at best
• You can borrow more from HDB (85 per cent) compared to a bank (75 per cent)
• HDB loans allow you to pay your downpayment fully using CPF if you have enough savings. For bank loans, you need to pay at least 5per cent in cash
• There is no early repayment penalty for HDB loans, but for banks it is 1.5 per cent

Let’s take a closer look at five key differences between HDB loans and bank loans.

1. HDB loans let you pay your downpayment in CPF

With an HDB loan, there’s a minimum downpayment of 15 per cent. You’re allowed pay your downpayment fully using CPF, provided you have enough savings in your Ordinary Account.

However, if you get a bank loan, you’ll have to cough up quite a bit more initially. For a start, the initial downpayment is 25 per cent for a bank loan, of which 5 per cent 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, you might want to consider an HDB loan instead, if you qualify. Being able to access your CPF could give you a wider range of property options.

2. HDB loans have higher interest rates than bank loans

As mentioned, the HDB loan interest rate is 2.6 per cent, and seldom changes. Bank rates are more variable; they’re based on current SORA rates, which are usually cheaper. Bank interest rates typically range between 1 per cent to 2.05 per cent.

The downside is that the bank’s rates are variable. You’re guaranteed the same interest rate for two to three years (with a 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, an HDB loan is a simpler choice.

Otherwise, get a comparison of mortgage loans (Singapore) from 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. HDB loans are 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 two to three 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. HDB loans have 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 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 an HDB loan and plan to settle it quick.

With banks, attempting to pay early lands you a 1.5 per cent prepayment penalty. Yes, the banks will “punish” you for what you might think as good behaviour.

5. HDB loans are more forgiving than bank loans

This is the biggest appeal of an 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.

HDB loan vs bank loan – the verdict

As with all matters of personal finance, the best home loan in Singapore really depends on your lifestyle.

An 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 downpayment on your house is lower, and you have more chances with missed repayments. Though there’s a higher interest rate, it’s less taxing on your cash flow.

But if you understand the housing market well, and you know how to refinance your bank loan, a bank loan could ultimately be cheaper. That said, you must be aware of the terms & conditions, because banks are a lot less forgiving than HDB.

This article was first published in MoneySmart.