HDB loan vs bank loan: Which one should you pick?

Choosing between a HDB loan or bank loan is never a straightforward decision. Your financial situation and personal preference will almost invariably play a big part in helping you and your partner decide on the loan that suits your requirements.

Once you’ve made the big decision to apply for a HDB flat (congratulations!), the next step would be to choose between a HDB loan and a bank loan. Should you go for the HDB loan with more flexibility, smaller down payments but higher interest rates?

Or, should you sign up for a bank loan with lower interest rates but more restrictions and a higher down payment? These aren’t easy questions to answer — we get it.

So, here’s elaborating on everything you need to know about both HDB loans and bank loans, including their respective pros and cons. 

HDB loan: All you need to know 

A HDB loan is only applicable only if you’re buying a HDB flat. This loan is given to you by the Housing and Development Board. This loan won’t be applicable if you plan to purchase a private residence. 

HDB loan at a glance: 

• Interest rate: 2.6 per cent p.a.
• Loan-To-Value limit (LTV): For new flats, this is up to 90 per cent of the purchase price. For resale flats, this is up to 90 per cent of the resale price or value, whichever is lower. However, if the remaining flat lease cannot cover the youngest buyer to the age of 95 at the point of the flat application, the LTV will be pro-rated from the maximum possible of 90 per cent.
• Downpayment: Up to 10 per cent (full amount can be paid using CPF) 
• Early repayment will not incur a penalty
• Couples combined income has to be less than $14,000

For HDB loans, the housing loan amount offered depends on the buyers’ age, monthly income and financial situation.

If you buy an uncompleted flat, such as a Build-To-Order (BTO) flat, directly from HDB, the latter will review your financial standing close to the completion of the flat for a housing loan disbursement. 

HDB loan eligibility criteria 

Before you consider a HDB loan, the first thing you should check is if you’re eligible for it. Here are the eligibility criteria to apply for a HDB loan in Singapore. 

*This average gross monthly income is calculated during your HLE application. For HLE applications and flat applications received before Sept 11, 2019, the income ceilings are $12,000 for families, $18,000 for extended families and $6,000 for singles.

Pros of choosing a HDB loan

1. Smaller downpayment amount to pay 

With an HDB loan, your down payment is up to 10 per cent of the purchase price. The downpayment can be paid using your CPF Ordinary Account (OA). If you have a considerable amount saved in your CPF OA, you will not incur any out-of-pocket costs to pay for the down payment.

This gives you more cash on hand for other imminent costs such as renovation, new furniture, investments and more. If you do not have enough in your CPF OA, you will have to top up the rest of the down payment in cash. 

2. Interest rate 

The HDB concessionary housing loan interest rate is pegged at 0.1 per cent above the prevailing CPF OA interest rate which stands at 2.5 per cent. It may be revised from time to time, in line with the revision of CPF interest rates.

3. It can be changed to bank loan 

The great part about it? HDB loans do not have a lock-in period. If you want to switch your HDB loan to a bank loan, consider it done. You can choose to take up a HDB loan before refinancing with a bank a few years later for a loan with lower interest rates.

However, a homeowner who chose to take up a bank loan cannot opt to switch to a HDB Loan during the mortgage period. 

4. No penalty for early repayment

You have the option to pay off your HDB loan early without having to worry about incurring a penalty. Now, there are various reasons why you might choose to do this, especially if you have the advantage of an influx of cash.

You might have your reasons — reducing the total interest you pay over the years or gaining your peace of mind in the knowledge that you’re not burdened by a loan. 

While not everyone has the financial muscle to pay off their loans early, having this option to repay early is better than being committed to the entire tenure of the loan. This also means that you can opt to pay the loan off earlier if you wish to. 

Cons of choosing a HDB loan

1. Paying a higher interest rate 

With the prevailing interest rate at 2.6 per cent p.a., this often turns out to be higher than interest rates charged by banks for bank loans. 

Banks typically peg their interest rates to the SIBOR (Singapore Interbank Offered Rate) or fixed deposit home rate. While there will be fluctuations, this interest rate tends to be lower than the 2.6 per cent p.a. in interest that you would pay for your HDB loan.  

Bank loan: All you need to know

You can get a housing loan from any of the financial institutions regulated by the Monetary Authority of Singapore. Here’s giving you a quick glance at bank loans: 

• Interest rate: Variable interest rate packages; typically ranges between 1.2 per cent to 3 per cent p.a. 
• Loan-to-Value limit (LTV): Up to 75 per cent
• Downpayment: Up to 25 per cent (whereby at least 5 per cent must be paid using cash) 
• Early repayment will incur penalty 
• Minimum loan amount required

There are different types of bank loans available. You can choose from a fixed rate package, floating rate package or a combination of both. As we’ve stated earlier, interest rates of bank loans are pegged to the SIBOR or SOR (Singapore Swap Offer Rate), or based on the Fixed Deposit Home Rate (FHR). 

Fixed rate packages provide you with a fixed interest rate for a specific period of time, typically between 1 to 5 years. For example, there are 2-year, 3-year and 5-year fixed rate packages available. And there’s usually a penalty incurred for early repayment of the loan during this period. 

Floating rate packages typically vary in terms of the interest rate, lock-in period and minimum loan amount.

Pros of choosing a bank loan

1. Lower interest rate

The interest rates are usually lower than the 2.6 per cent p.a. charged for a HDB loan. Banks also sometimes offer other perks such as 24-hour emergency home assistance. 

2. Eligibility criteria is easier to meet 

Bank loans have fewer restrictions compared to the HDB loan eligibility criteria. For example, there is no income ceiling set for bank loans.

For couples that do not meet the HDB loan eligibility criteria, such as those that earn more than the income ceiling set by HDB, your only option is to apply for a bank loan. However, bank loans also tend to have a minimum loan amount required.  

Cons of bank loans

1. Penalty incurred for early repayment 

There is usually a lock-in period for bank loans, unless you opt for a bank loan without a lock-in period. Opting to repay your loan early, within the lock-in period, will cause you to incur a penalty that is usually 1.5 per cent of the loan amount. 

2. Interest rate fluctuates and is not guaranteed 

The bank loan’s interest rate will see fluctuations as it is affected by movements in the market. Even with a fixed rate package, this interest rate is fixed only for the first few years that is stated in the package, and not for the entire loan tenure.

This also means that the interest rate you pay a few years down the road is likely going to be different from the rate you see today. 

3. Higher down payment required 

The down payment required for taking up a bank loan is up to 25 per cent of the flat price. Of this 25 per cent, at least 5 per cent has to be paid in cash with the remaining 20 per cent being paid using your CPF OA or cash.

For example, if you are taking a bank loan to buy an HDB flat priced at $400,000, you would have to pay at least $20,000 in cash for the downpayment.

If you do not have enough in your CPF OA, you will have to top up the rest of the down payment in cash. This could be quite a hefty amount to fork out.

Especially for those that don’t have disposable income or sizeable savings, or for couples preparing for big-ticket expenses such as an upcoming wedding. 

4. Cannot be changed to a HDB loan 

Unlike a HDB loan that allows you to switch to a bank loan, the same cannot be done when you choose to take a bank loan. So, you’ve got to be sure since you cannot reverse this decision in the future. You can only opt to refinance and take another loan with the bank. 

HDB loan or bank loan: Which one should you go for? 

Unlike a HDB loan that allows you to switch to a bank loan, the same cannot be done when you choose to take a bank loan. So, you’ve got to be sure since you cannot reverse this decision in the future. You can only opt to refinance and take another loan with the bank. 

HDB loan or bank loan: Which one should you go for? 

Now that you have a clearer picture of what the HDB and bank loans entail, here’s a side-by-side comparison of these two housing loan types. 

You could also use this handy calculator from CPF to help you estimate the monthly instalment payable on a housing loan.

Armed with your knowledge on both HDB and bank loans, you can weigh in considerations that are important for you and your partner before you come to a decision.

This article was first published in SingSaver.com.sg.