Buying our first HDB Built-To-Order (BTO) flat can be an exciting and joyous event as we embark on the next phase of our lives with our spouse (or spouse-to-be). In the wake of this momentous occasion, we need to ensure that we are making prudent financial decisions for our HDB flat purchase as we will only receive the keys close to three years later.
Apart from buying an affordable flat, including selecting a unit size and a location that is appropriate, we have to decide on our home loan.
Taking An HDB Home Loan VS Bank Home Loan
Taking up an HDB home loan gives us the option to fork out an initial downpayment of only 5%, with an additional 5% in downpayment when we receive the keys to our HDB BTO homes. This adds up to paying a total downpayment of 10% (or taking a total HDB housing loan of 90%), all of which can be paid for with funds in our CPF Ordinary Account (OA).
Taking a bank loan requires us to pay an initial downpayment of 10%, of which 5% must be in cash, with an additional 15% downpayment required when we collect our keys. This means we need to pay a total downpayment of 25% (or are only able to take a total bank home loan of 75%), of which only 20% can be paid for with our CPF OA funds.
The difference is 15% in downpayment, which can amount to a sizeable sum for many couples just starting out our careers. Having to pay an initial 5% in cash for our downpayment can also be prohibitive for young couples.
To receive the maximum possible home loan, we need to opt for the HDB housing loan, which allows us to loan up to 90% of the property price.
In this article, we look at five reasons why taking the maximum amount and/or tenure for our home loan may actually be the more prudent financial decision.
# 1 Flexibility In Extending Or Shortening Our Loan Tenure
Applying for the maximum loan tenure and amount with an HDB housing loan from the start enables us to pay the lowest amount in monthly mortgage payments. This is financially prudent as we are allowed to change the repayment period of our HDB housing loan at any point in time without penalties.
We can’t tell for sure what our financial situations may be three years down the road, when we get the keys to our HDB BTO flat. Opting to pay the lowest amount possible gives us the ability to afford other unplanned expenses, especially if we are raising our children, caring for our parents or dealing with other costs.
In addition, even if we are able to fork out a larger sum each month, we can always decide to shorten our loan tenure (and pay a higher mortgage each month) or make use of the excess cash in other ways, including investing.
# 2 Ability To Prepay Housing Loan
Another reason why we should take the maximum HDB housing loan is that we are also able to make partial capital repayments at any point without any penalties.
If we have accumulated sufficient funds in our CPF Ordinary Account (OA) or in cash, and wish to repay part or all of our HDB housing loan, we can simply choose to do so at any time. We have two options when we choose to make such partial capital repayments:
# i Shorten the repayment period by continuing to make the usual monthly instalment; or
# ii Stay on the same repayment period by revising down our monthly instalment amounts
This brings us to the next point.
# 3 Unable To Take Home Equity Loans
While we are able to make prepayments on our HDB housing loan, we aren’t able to do the opposite – take out a home equity loan – if we need the funds. This is true even if we have taken a bank loan.
The main problem with not getting the maximum loan amount of 90% is that we can never reverse the decision. This means if we pay a downpayment of 20% or 30%, as opposed to a minimum of 10%, we can never choose to take the money out of our HDB flat. If we run into a financial struggle, having more funds tied in our HDB flat will not help us, as the only way we can unlock these funds may be to sell the property.
Conversely, if we take the maximum loan amount, we always retain the flexibility to pay more any time we like. This also gives us the option of deciding to invest our funds elsewhere or provide us the liquidity we need if we face financial struggles.
# 4 Ability To Switch To A Bank Loan (Or Refinance With A Bank Loan)
Taking a 90% HDB housing loan is a real advantage many of us don’t realise. If we take a bank home loan, the maximum loan we can take is only 75%. The price for this advantage is that we have to pay an interest of 2.6% on our home loan, compared to 1.7% on bank home loans.
Again, if we want to refinance with a bank, we can always choose to switch our HDB housing loan for a bank loan at any point without penalties. However, this is an irreversible decision as we cannot switch from a bank home loan to an HDB housing loan.
# 5 More Cash/Funds With Us
Taking the maximum loan amount and tenure always means we have more funds with us. There are several advantages to this.
Keeping Some Balance In Our CPF Ordinary Account
Young couples applying for a BTO flat should not empty out their CPF Ordinary Account just to save on their monthly mortgage payments. This is because many of us may just be starting out in our career and haven’t accumulated that much funds in our CPF accounts yet.
While the interest we receive on our CPF Ordinary Account is 2.5% and the interest we have to pay on our HDB housing loan is 2.6%, the first $60,000 in our CPF accounts, including up to $20,000 in our Ordinary Account, earns an additional 1% interest rate. This means we may be sacrificing 0.9% in interest returns on our funds rather than gaining 0.1% in interest savings.
Young couples applying for their first BTO flat are usually just starting out in their careers. This means they may not have much cash on them in the first place.
Being able to afford a larger downpayment or higher monthly mortgage does not mean that their liquidity needs are fulfilled. This is because young couples may not have built their emergency funds, started growing their retirement nest egg or even planned for additional expenses as they expand their family size.
This is why starting off with the maximum loan amount and tenure enables young couples to plan for these things, while still allowing them the flexibility to prepay their loan, shorten the loan tenure or refinance with a bank loan.
If we have sufficient cash to pay for a larger downpayment, we may be better served investing the funds. This is because we pay 2.6% per annum on our HDB housing loan, while we may be able to achieve an investment return greater than that via investments.
Taking the maximum loan amount and tenure gives us a greater amount of funds that we can potentially put into investments to beat the interest rate that we are paying on our HDB housing loan.
Having greater cash reserves allows us to prioritise our debt repayment. As mentioned, the HDB housing loan charges us an interest of 2.6% per annum. This means we should pay off the right debts that we have, in the order of those charging the highest interest to lowest interest (which is usually a home loan).
If we have outstanding student loans, car loans, personal loans or credit card debt, it may be wiser to pay these off rather than our HDB housing loan as these loans usually charge heftier interest charges.
Retaining Flexibility With A HDB Housing Loan
As highlighted in the scenarios above, there are good reasons to go with the maximum loan amount and tenure on our HDB Housing Loan. For many young couples just starting out, we may not have planned for everything, including our savings and investment needs, building a retirement nest egg or considered the cost of a larger family size.
Even if we can afford to pay more, we should go with this the maximum loan amount and tenure for a start, while we figure out a finance. This provides the greatest flexibility, even if we decide we can prepay our HDB housing loan or increase our monthly mortgage payments.
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