One of the first financial decisions that Singapore families will have to make when buying a HDB flat is the type of housing loan to take.
In essence, we have two choices. We can opt for a HDB loan or a bank loan. But which should you opt for?
In recent years, more people are leaning towards taking a bank loan. That’s because interest rates over the past decade has been at historical low. This means in spite of the fact that a HDB loan is supposed to be a “concessionary housing loan”, it has been more expensive as compared to private bank loan.
We also see more people, with good intentions, urging their friends to take on the cheaper bank loan. But is their advice really correct? In this article, let us explain both the pros and cons of each option.
Eligibility Criteria For A HDB Loan
Before we go into the comparison, let’s first run through the eligibility criteria for a HDB loan.
> At least one buyer must be a Singapore citizen.
> Have not taken two or more HDB loans before (i.e. max two HDB loans).
> Monthly household income not more than $12,000.
> Must not have own or disposed of any private residential property in the 30 months before the date of application for an HLE letter.
You can find more details on the HDB website.
If you do not meet any of the above eligibility criteria, then the comparison doesn’t matter. Your only option will be to go for a bank loan.
If you are deciding between a HDB loan or a bank loan, that means you are intending to buy a HDB flat. Hence, all the regulations of buying a HDB flat applies. For example, for the first five years, you are required to live in it and cannot sell or rent the entire flat out.
We will make a reasonable assumption to the loan required for the homeowner.
Here are our assumptions.
Cost of flat: $400,000
Loan Period: 20 Years
Down payment: 20%
Loan Required: $320,000
Interest Rate: 2.6%
How Much Savings Will I Get By Taking A Bank Loan?
The main reason for taking a bank loan is to enjoy lower interest rates, to understand how much you could potentially save, let’s take a look at the various types of interest rates you can expect to pay.
Most banks offer interest rates that will be pegged to SIBOR, SOR or even a Fixed Deposit Home Rate. Banks also usually offer attractive teaser rates for the first few years in order to entice potential customers.
Here’s a comparison between a HDB loan and bank loans based on actual rates that you can get from the three local banks today.
Cost of Flat: $400,000
Loan Required: $320,000 (20%)
Loan Duration: 20 Years
|Bank Interest Rate||Bank Loan||Total Interest||HDB Loan (2.6%)||Total Interest|
|DBS Home Loan (FHR8 + 1.45%)||1.65%||$1,566.32||$55,916.71||$1,711.32||$90,717.22|
|OCBC Sibor-dependent rate (1M Sibor + 0.6% first year, 0.7% from the 2nd year)||1.3% (current SIBOR) + 0.7% (rates from the 2nd year) = 2%||$1,618.82||$68,518.40||$1,711.32||$90,717.22|
|UOB Property Loan (Fixed for first two years)||1.85%||$1,596,19||$63,086.18||$1,711.32||$90,717.22|
To find out more about DBS Home Loan, check out their website
To find out more about OCBC Home Loan Packages, check out their website
To find out more about UOB HDB Loan, check out their website
Our comparison above is based on different products offered by the local banks and do not represent a recommendation on our part for these products. We have taken the liberty to select different products from each bank to give you a better overall picture on the type of loan packages that homeowners can expect. It does not mean that the DBS Home Loan (FHR8 + 1.45%) is better than the other banks, just because it’s currently offering lower interest rate.
The point we are stressing here is that it’s true that the banks are able to offer a lower initial advertised interest rate compared to the HDB loan. If homeowners are able to secure this advertised interest rate for the duration of the loan period, then a bank loan will indeed be better than a HDB loan.
For example, the difference in interest payable between the current DBS Home Loan (FHR8 + 1.45%) and a HDB loan is about $44,000 over a 20-year period, or about $183 per month.
It also goes without say that the larger the sum of money you borrow, and the longer the duration of the loan, the more enticing a bank loan will be.
What Are The Disadvantages Of Taking A Bank Loan?
Now that we have explained why a bank loan can be financially lucrative, let us explain what are some of the disadvantages of taking a bank loan.
# 1 Interest Rates Are Never Guaranteed
For those of you who don’t already know, interest rates offered by banks are (almost) never guaranteed.
Even if you take a fixed loan package, the interest rates are only guaranteed for a period of time. After the period, the “fixed” period, the interest rates become a floating rate. Most home loans interest rates are pegged to the SIBOR or SOR. Both SIBOR and SOR are common benchmarks that banks used to determine interest rates for home loans. They appear similar but they are not the same. You can read about their differences here.
When we first wrote an article back in 2015 about whether a HDB loan or bank loan is better, 3-month SIBOR rate was at 1.13%. Since then, it had continued creeping upwards and is now at 1.44% (as of the time this article was written).
Over a 14-year period from 2000 to 2013, we can see that 3-month SIBOR rate can fluctuate from as high as 3.44% (2006), to as low as 0.38% (2012).
If you take a bank loan, you have to be prepared that what you are paying is unlikely to be what you will be paying in the long-term.
# 2 Constant Refinancing Or Repricing Fee
To constantly enjoy the advertised (i.e. best) interest rate, you will need to keep refinancing or to reprice your existing bank loan. This is typically done once every three years.
Repricing is cheaper than refinancing because repricing means sticking with your existing bank while refinancing involves moving the housing loan to another bank.
As a general rule of thumb, you should reprice or refinance if it allows you to save more in terms of interest (over the next three years) than what it would cost you in legal fee.
At the same time however, it’s worth remembering that the actual savings that you derive from choosing a bank loan will be lower the expected because of the refinancing or repricing fee, even if interest rates were to somehow remain the same for the duration of the loan.
If you take a bank loan for 20 years, you should expect to refinance or reprice it about six times before the end of your loan. You should find out from your mortgage broker about the cost of refinancing or repricing, and add that to the savings that you think you are getting to see if a bank loan truly makes sense.
# 3 Early Prepayment Fee
Most homeowners don’t realise this but there is an early repayment fee that applies if you sell your HDB flat within the commitment period for bank loans. The commitment period is typically the three years lock-in period that takes place after you refinance or reprice your loan.
For example, if you were to refinance your bank loan today and sell your HDB flat two years later, you will be liable to pay the early prepayment fee. This is typically about 1.5% of the remaining loan amount.
The workaround here is to NOT to refinance or reprice your home loan if there is a possibility that you will sell your HDB flat within the next three years. However, this also means missing out on the advertised interest rates which got you attracted to a bank loan in the first place.
# 4 Higher Downpayment
For HDB loans, the downpayment required is just 10% (payable by CPF). For bank loan, the downpayment required is 20%, of which at least 5% has to be paid in cash.
# 5 Once You Take A Bank Loan, You Can’t Switch Back To A HDB Loan
As opposed to taking a HDB loan first, where you can still convert to a bank loan in the future, taking a bank loan for your property is a one-way decision, you can’t revert back to a HDB loan.
This is also one of the main reasons why we suggest for new homeowners to opt for a HDB loan first if they can. As and when you are convinced by the merits of opting for a bank loan, you can go ahead to switch again in the future.
# 6 Minimum Amount Required
Many people don’t realise this but most banks don’t allow you to take a loan if the loan amount is below $100,000. In general, this isn’t a big issue if you are applying for a new loan, since you would not be able to take the loan anyway.
The danger here is when you are unable to refinance or reprice your loan once it falls below a certain threshold, and are thus, stuck with a loan that has an unfavourable interest rate. To avoid this, ensure that you refinance/reprice your loan just before it dips below $100,000 so that you are not stuck with a loan with a bad interest rate.
Which Would You Choose?
We hope that through this explanation, HDB homeowners will realised that simply opting for cheaper bank loans isn’t necessarily better compared to HDB loans with slightly higher interest rates.
At the end of the day however, it’s up to individual homeowners to determine for themselves what makes the most sense, based on the plans that they have.
If you like to find the most suitable home loan among banks in Singapore, we have a guide to choosing the most suitable home loan. In this guide, we have discussed about how the loan duration can affect your repayment, whether you should choose fixed or floating interest rates, and even the penalty for early repayment.
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