The majority of Singaporeans buy an HDB flat to live in. In fact, HDB flats are home to over 80% of Singapore’s resident population, and 90% of them own their HDB flat.
One of the most common questions we ask ourselves when buying an HDB flat is, of course, what kind of government grants we are eligible for. Probably the next common question is whether we should go for an HDB Loan or a Bank loan.
Bank Home Loans Are Cheaper Than HDB Home Loans
When discussing this question, many of us may already know that bank home loans offer better interest rates.
This is because banks tend to use the current interest rate environment as a gauge for the interest rates they charge. Many bank home loan interest rates are currently hovering at the 1.2% per annum mark.
On the other hand, the HDB home loan is pegged to charge 0.1% higher than the interest rates paid on our CPF Ordinary Account. This means we currently pay 2.6% per annum on our HDB home loan (because the CPF Ordinary Account is currently paying 2.5% per annum).
Since bank home loan interest rates are cheaper, why would anyone still choose an HDB home loan then? We give you 6 good reasons why an HDB home loan is better.
#1 Forking Out A More Affordable Downpayment
We need to consider the Loan-to-Value (LTV) limit when purchasing our home in Singapore. The LTV limit is the maximum home loan you can receive when purchasing your HDB flat. You can pay the remaining amount in a combination of cash and CPF.
When taking an HDB home loan, our LTV limit is 85% – which means we need to pay a minimum downpayment of 15% on our HDB flat. On the other hand, the LTV limit for a bank loan is 75%, when means we need to fork out 25% of the home price in cash and/or CPF.
For example, during the latest bumper BTO launch in August 2020, 4-room flats ranged from $253,000 (cheapest 4-room flat in Chua Chu Kang) up to $617,000 (most expensive 4-room flat in Geylang).
When taking an HDB home loan, we need to pay $25,300 and $61,700 respectively for the downpayment on our HDB flat. However, if we choose a bank home loan, we need to fork out $63,250 to $154,250 for the same flats. This can be unaffordable for many couples, especially if we are just starting out in our career.
#2 Being Able To Pay Our Downpayment Entirely In CPF Savings
As discussed in the previous point, we need to fork out a downpayment worth 15% of our flat price if we are using an HDB home loan and 25% of the purchase price if we are using a bank home loan.
How we fork out this amount can be in a combination of cash and CPF Ordinary Account (OA) savings.
When using an HDB home loan, we can fork out the entire 15% of the purchase price from our CPF OA savings. However, if we are using a bank home loan, we need to pay at least 5% of the downpayment in cash, while the remaining amount can be paid in cash and CPF OA savings.
Taking the above example again, for a $253,000 (cheapest 4-room flat in Chua Chu Kang) and a $617,000 (most expensive 4-room flat in Geylang), we can pay the entire 10% or $25,300 and $61,700 respectively in CPF savings if we are taking an HDB home loan. Note that the actual amount may be lower due to housing grants which go towards paying the downpayment.
If we are using a bank home loan, we must pay 5% of the purchase price in cash for the downpayment. The rest of the funds can be from our CPF OA savings, cash or housing grants.
#3 Non-Guaranteed Interest Rates On Bank Home Loans
While bank home loan rates are cheaper today and look like they will continue to be cheaper than HDB home loan rates in the coming years, this is not guaranteed.
Let’s assume we bought a home in 2000 and took a bank home loan paying 3-month SIBOR + 0.85%. Here’s what our loan would look like compared to an HDB home loan.
|Year||Interbank 3-Month SIBOR||Bank Home Loan
(SIBOR + 0.85%)
|HDB Home Loan|
Source: Beginning of year interest rate. Interbank 3-month – Monetary Authority of Singapore (MAS); SIBOR 3M – Association of Banks Singapore (ABS)
If we were on this bank home loan rate, we would have saved some money, but as we can see, the interest rates may not be that great. Of course, we can typically get preferential rates for repricing or refinancing, which may give us a much bigger saving.
Bank home loans are also not guaranteed, as they can change which rates they want to peg to (usually SIBOR or SORA) and how much premium they will charge on top of it.
Do note that HDB home loan rates, while not guaranteed either, will always be 0.1% higher than the interest returns we earn on our CPF OA savings.
#4 Constantly Having To Refinance Or Reprice
As mentioned above, if we simply stick to the bank home loan rate, we may not be getting a great deal. This means having to refinance or reprice is an important factor in getting bigger savings on our bank home loan.
This means constantly having to go through the process of finding the best or cheapest bank home loan rate in the market every three years. Missing several months will cost us quite dearly, as you can see from the table above.
Another problem with constantly having to refinance or reprice is that we have to pay a financing cost. We need to constantly calculate whether it will be cost-saving for us to refinance or reprice our bank home loan.
Finally, while not a common situation, if we want to use a bank home loan rather than an HDB home loan, we typically need to take a loan amount greater than $100,000. This may not impact us at the start of our home loan, but at the tail-end when we have a bank home loan of less than $100,000 it will be impossible to refinance or reprice, leaving us having to pay a potentially bad home loan rate – whatever it may be at that point.
#5 Fees For Pre-Payment
Another type of fee many of us may neglect to consider is that banks will charge us a pre-payment fee if we sell our HDB flat and cut short our bank home loan within our lock-in period (where we are able to receive the preferential home loan rates).
One way to work-around this is to not refinance or reprice while we are looking to sell (if we have past the 3-year lock-in period). During this period, we may have to fork out a slightly higher home loan rate.
If we are on the HDB home loan, we do not need to worry about this pre-payment fee.
#6 You Can Make Use Of HDB Enhanced Contra Facility To Purchase Your Second HDB Flat
One lesser-known advantage of using the HDB home loan is the fact that you can utilise the HDB Enhanced Contra Facility to purchase your second HDB flat. This contra facility allows you to sell your existing HDB flat and at the same time, buy another HDB flat using the sale proceeds and refunded CPF monies. Essentially, it is an additional loan that makes up the shortfall in funds if you are waiting for the sales proceeds of your existing flat to cover the purchase of your next flat and reduces your cash outlay.
This Is Not To Convince You To Choose The HDB Home Loan
By highlighting valid reasons to continue choosing an HDB home loan even though it is more expensive, we’re just trying to shine some light on potential advantages we may overlook in our pursuit of lower interest rates.
At the end of the day, we have to choose a home loan that makes the most sense for us, having considered the pros and cons. This could still be a bank home loan.
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