Singaporeans have a strong demand for housing. This has led to a rise in prices and, subsequently, financing options to make it possible for more people to purchase their own homes.
One of the most popular financing options is the HDB loan. But there is also the option of applying for a bank loan.
One of the questions you need to answer is whether you should get a loan from HDB or the bank. Read our article to find out if you should get a bank loan for HDB flat or apply to HDB purchase a property.
What To Know About A HDB Loan
If you are looking to purchase a home in Singapore, you will likely need to take out a HDB loan. Here is what you should know about a HDB loan:
You Can Pay Your Downpayment For A HDB Property Using Your CPF Savings
When you apply for a HDB loan, you need to pay a minimum downpayment of 20% of the value of the property. You can pay the full downpayment using your CPF savings.
HDB Loans Have A Higher Interest Rate Than Bank Loans
HDB offers loans at a fixed rate of 2.6% per annum. The rate has remained constant for several years. In comparison to banks, the rate is higher.
Banks offer loans at a rate of 1-2.5% per annum. Bank rates, however, are valid for two to three years.
Although the interest rate of a HDB loan is higher, the advantage is that you can budget and plan your finances easily since the monthly repayment rates are fixed.
You Have To Choose Between A New Or Resale Flat
HDB offers loans to buyers who would like to own HDB flats. You can opt for HDB resale or new Build-To-Order (BTO) flats. If you choose a BTO unit, you will have to wait for six months.
A BTO flat is cheaper than resale flats. Remember that the more expensive the property, the more downpayment you have to pay and the higher the loan amount.
The only downside to a BTO flat is that you must ballot and compete with other applicants.
There Are No Penalties For Early Repayment
If you have a windfall, you will not incur any penalty if you decide to pay off your HDB loan early. This is unlike banks, which may charge you a hefty payment on an early payment.
Should You Get A Bank Loan Or A HDB Loan?
Which is the better choice: a bank loan for HDB, or a HDB loan? The choice between a HDB loan and bank loan depends on your lifestyle. Both have their pros and cons.
Here are the pros and cons of a HDB loan:
- Let’s say you receive a lump sum amount and pay off your loan early. With a HDB loan, there are no penalties if you clear your loan early.
- HDB loans are ideal for young adults who are just starting their working lives as the downpayment is lower. Plus, with HDB, the penalties when you miss a payment are not as harsh as those of a bank.
- It is easier to manage your cashflow with a HDB loan. The monthly repayments are fixed, making it easier to manage your cashflow. You are aware of the repayment amount well in advance.
- You can’t use a HDB loan to purchase private properties. HDB loans are used to purchase HDB flats.
On the other hand, if you opt for a bank loan, here are the upsides and downsides:
- You have a chance to refinance your loan for a lower interest rate. If you understand the property market well and you know how refinancing works, then you can choose a bank with the best rate. However, you have to understand the bank’s terms and conditions because they are less forgiving.
- Banks will charge you a penalty if you opt to pay your loan earlier than your scheduled date.
The decision on whether to choose a HDB or bank loan depends on your lifestyle and preferences. If you have just started working, a HDB loan is ideal as it requires a lower downpayment.
On the other hand, if you opt for a bank loan, you can purchase any property you wish, but you will need to fork out a higher downpayment. The maximum a bank can offer is 75% of the property value, and you have to raise 5% in cash and 20% from your CPF savings.
Key Differences Between A HDB Loan And A Bank Loan
There are several key differences between HDB loans and bank loans.
First, HDB loans are only available for properties purchased from HDB in Singapore, while bank loans can be used to finance any type of property.
Second, HDB loans typically have lower interest rates than bank loans. Finally, HDB loans require a downpayment of at least 20% as of 30 Sep 2022, while bank loans may require a 25% downpayment.
For HDB loans, you can use your CPF to pay the downpayment. Those who opt for bank loans will have to raise 5% of the downpayment in cash and 20% from CPF.
In summary, here are the differences you should take note of:
|Current rate is 2.6%
|Current rate at 1.5-3%. Depends on the set rate and the banks
|20% of the property value. You can pay the whole downpayment from your CPF
|25% of the property value. Pay 5% in cash and 20% from your CPF account
|80% of the property purchase value for new or resale flats
|75% of the purchase price
|Penalty On Late Payment
|7.5% per annum
|Depends on the bank. They are stricter than HDB
|You will need to have an income and be a citizen of Singapore
|Your credit score must be good
Thus, when deciding whether to finance a property purchase with a HDB loan or a bank loan, it is important to consider these key differences.
If the property is being purchased from HDB, an HDB loan may be the better option.
Pros And Cons Of A HDB Loan And A Bank Loan
There are both pros and cons to taking out an HDB and a bank loan. We’ll list them out so you can make the right decision.
Pros And Cons Of A HDB Loan
Advantages Of A HDB Loan
- HDB loans have fixed repayments. The interest rate on HDB loans is less prone to fluctuations. This makes it easier to manage your cashflow as you will be aware of the amount you need to pay well in advance.
- You can make early repayments with no penalties. In the event of a windfall, you can make an early repayment without any penalties.
- You can refinance a HDB loan to a bank loan. There is no lock-in period.
Drawbacks Of A HDB Loan
- Higher interest rates as compared to bank loans. The current interest rate is at 2.6%, which is higher in comparison to banks.
- You will pay a higher amount in the long run. The higher the interest rate, the more you will pay for your property in the long run.
Pros And Cons Of A Bank Loan
Advantages Of A Bank Loan
- There is no limit on the property you can purchase. If you opt for a bank loan, you can purchase any property.
- Lower interest as compared to HDB. Banks offer an interest rate of 1-3%. The rate fluctuates depending on the set rate by the Association of Banks in Singapore.
- Loan refinancing is allowed. You can refinance your loan and get a lower interest after two to three years.
Disadvantages Of Bank Loan
- Banks will charge punitive amounts if you miss any repayments.
- Fluctuating interest rates make it hard for you to manage your cashflow. You may not be sure of how much you need to pay in the long run.
Eligibility Criteria For Each
Before you apply for a HDB loan or bank loan, you will need to make sure you are eligible. Here’s the eligibility criteria for each.
Eligibility Criteria For A HDB Loan
- At least one of the buyers must be a Singaporean citizen
- A single person must earn $7,000 per month to purchase a resale five-room flat or a new two-bedroom flexi flat in a non-mature estate. Families must be earning at least $14,000, while extended families should have an income of $21,000
- A buyer applying for a HDB flat should not have owned or disposed of any private residential property in the last 30 months before the date of application for a HDB loan eligibility letter
- The buyer should not have an interest in the international real estate market
The amount of loan you can get depends on the remaining lease on the property. It depends on how long it can cover a young buyer to the age of 95 years.
Eligibility Criteria For A Bank Loan
- You must have a good credit score
- The bank sets the minimum and maximum age of the buyer
- The minimum income the borrower should have depends on the specific bank
Why The TDSR And MSR Matter
The Total Debt Servicing Ratio (TDSR) is a measure of how much of your income goes towards your debt. The TDSR affects how much you can borrow as the allowed limit is 55% of a borrower’s income.
The Mortgage Servicing Ratio (MSR) affects how much you can borrow for a HDB flat. The MSR is the maximum amount of your income you can use to pay off all your property loans. Currently, MSR is capped at 30% of the borrower’s income.
Both TDSR and MSR are used to determine how much you can borrow.
Make The Right Choice For Your Lifestyle
There are many factors to consider when deciding whether to get a bank loan for HDB flat. Ultimately, it is up to you to weigh the pros and cons and decide what is best for your situation.