HDB Loan or Bank Loan? Choosing The Right Mortgage Plan

With Singapore being one of the most expensive places to live, it makes sense for us to consider our finances before purchasing a home in the country. For most people, buying a house in Singapore involves taking out a mortgage.

A home mortgage may be one of the biggest loans we will ever take in our lives so that means proper research should be done so that we don’t end up spending more than we need to on our mortgage repayments. Mortgage rates in Singapore will vary widely, depending on the cost and size of the property as well as your age and employment, much like anywhere else in the world.

We can use various home affordability calculators, including HDB’s payment plan calculator, which takes reference to our purchase price and our available funds, consisting of cash and CPF savings. These tools make it easy for potential buyers to see just how much they can afford when selecting a property in Singapore, based on their income and the current mortgage rates.

When looking to purchase property in Singapore, you can choose to take either a Housing and Development Board (HDB) loan or a bank loan. Either choice has its own pros and cons, which should be considered carefully.

Why Choose A HDB Loan

According to the Department of Statistics Singapore, around 80 per cent of Singaporeans live in estates of flats or apartments that have been developed by the HBD. These estates are towns that are self-contained and include medical facilities, education facilities, shopping centres and other recreational grounds for their residents to enjoy.

Flats sold by the HDB are subsidised. The overall aim of these flats is to provide Singaporean citizens with high-quality homes, vibrant towns and a real community-based area so that they can thrive within the area in which they live.

HDB loans are not available to all buyers as there are criteria for eligibility. For instance, at least one buyer must be a Singapore citizen with a total household income below $14,000.

If you’re eligible, you can apply for a HDB loan after receiving a HDB Flat Eligibility (HFE) Letter. This letter will inform you of the maximum mortgage amount that you may borrow, the expected payment period and the monthly instalment amounts. You can apply for the HFE on HDB’s website. You will need your pay slip and CPF contribution histories.

A HLE letter is valid for a total of 9 months from the date of issue. That means you need to purchase your HDB flat within the period of 9 months. Otherwise, you will need to reapply for it again.

An HDB loan is available to eligible buyers at a concessionary interest rate of 2.6% per year. This rate is 0.1% higher than the interest rate given by the CPF Ordinary Account. HDB loans do have some benefits. In addition to the stable interest rate, HDB loans give you more leeway when it comes to missing payments and reducing payments compared to housing loans from financial institutions. They are also more manageable in terms of your overall cash flow.

Read Also: Here’s Why It Doesn’t Make Financial Sense To Repay Your HDB Flat Home Loan Early

Why Choose A Bank Loan?

Despite the benefits of taking an HDB loan, there might also be reasons to consider a bank loan. For instance, it would be particularly useful for those who do not qualify to receive an HDB loan, leaving a bank loan as the only option.

One advantage over using a bank loan is the variable interest rates, which fluctuate based on the interest rate environment. Most bank loans in Singapore refer to the Singapore Overnight Rate Average (SORA).

In a low-interest-rate environment, banks may offer competitive-interest-rate home loan packages that might be lower than the concessionary HDB home loan. For example, from 2009 to 2021, home buyers in Singapore were able to finance their property purchases for generally under 2.6% p.a. using bank loans.

On the flipside, as interest rates rise, so do bank loans, reflecting the current market rate, which stands at above 3% p.a. Compared to the HDB concessionary loan, which has remained unchanged at 2.6% p.a., this makes bank loan rates higher (and more expensive).

Aside from the interest rate, there are other factors that we need to consider when taking out a bank loan. This includes a higher downpayment requirement (25%) for bank loans vs (20%) for HDB concessionary loans and an early repayment fee, which typically would be about 1.5% of the outstanding amount. Lastly, if we decide to take out a bank loan for our HDB property, we should be aware that we will not be able to convert it back to an HDB loan. This is unlike if we chose an HDB loan first, we would be able to convert to a bank loan at a later time if we decide to.

Read Also: Step-by-Step Guide to Refinancing Your Home Loan

Which Type Of Financing Should You Choose?

Whether you choose an HDB loan or a bank loan depends on your circumstances, taking into consideration your needs and abilities.

If you’d 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 how the loan duration can affect your repayment, whether you should choose fixed or floating interest rates, and even the penalty for early repayment.

Read Also: HDB Or Bank Loan: Pros & Cons To Consider Before Deciding On Which Housing Loan To Take

This article was last published on 13 August 2015 and updated with the latest information.