Purchasing an HDB flat is a big-ticket purchase, signifying a coming of age for many Singaporeans. Whether it’s for personal lodging or investment purposes, every move and decision must be considered with caution.
Clearly, no one wants to be stuck with a bad loan for the next two decades. When it comes to loans, the two main differences lie in interest rates and loan durations. Let’s go over the simple math of HDB loans, to help you purchase your first property with peace of mind.
Loaning From HDB
A provision for Singaporeans, HDB concessionary loans are aimed to bridge the gap in equity for aspiring homeowners. Currently, the interest rate for an HDB loan is 2.6%. However, these loans are tied to certain restrictions:
- The loan is only applicable to HDB flats
- At least one buyer must be a Singapore citizen
- Buyers’ monthly income must not exceed $14,000 (or $21,000 for extended families)
- Buyers must not own any private residence, locally or overseas.
- Buyers must not have taken more than two previous HDB loans
- Buyers must not have sold any private residential property within 30 months before the loan application
- Any singles buying a 5-room or smaller resale flat must not have a monthly income exceeding $7,000. This extends to buying a 2-room new flat in a non-mature estate under the Single Singapore Citizen (SSC) Scheme.
Benefits of loaning from HDB
Despite these strict prerequisites, it is still highly beneficial to take a loan from HDB for your first apartment. The first boon is that HDB loans allow you to pay your down payment from your CPF reserves, providing more liquidity and security in unstable times. In addition, HDB’s loan interest rates are fixed at 2.6% which further reduces any potential exposure during financially trying times.
In the event that times are good, HDB loans also have no early repayment penalties. In other words, you have the ability to fight the exponential compound interest by paying the loan off earlier. Lastly, HDB loans are more forgiving for deferred payments, as compared to traditional loans.
Loaning From a Bank
On the flip side, loans from a bank also present some upside as well. Bank loans typically have significantly fewer restrictions than an HDB loan. Most banks necessitate running a credit check on borrowers, which if cleared, gives you the green light. This is the only condition most banks have prior to lending.
Making up for this convenience, banks hold a fluctuating interest rate for bank loans, depending on the current SIBOR/SOR rates. While not guaranteed, a bank loan may potentially be better or worse than the HDB loan interest rate of 2.6%. As it stands, the current interest rate for bank loans sits at 1.2% to 1.5%, and that figure is expected to increase within the next three years. The majority of the bank loans also have a 1.5% penalty on early repayments, before the loan period ends.
Finally, bank loans demand an upfront down payment of 5% in cash, with the remaining 20% of the down payment being a choice between CPF or cash. Banks also only permit a loan up to 75% of the price of your HDB unit, as compared to the 90% that the HDB loan grants.
Which Loan to Go With?
To sum it up, bank loans are more flexible for sure but lack security and financial liquidity compared to an HDB loan. While there might not be as many hoops to jump through, the incentive of bank loans might appeal to seasoned homeowners with a bigger risk appetite. First-time homeowners, on the other hand, might prefer the reliability of a static interest rate and higher principal loan amount. Of course, there is the option of refinancing your loans if you take a private one from a bank, but that comes with a little bit of luck in the hopes that interest rates are better and that you can beat their compounding effects.
It is completely natural for first-time homebuyers to feel overwhelmed by a cloud of indecision. Consult Home Property Agent for all your housing loan needs and be confident to make the right choices for your first home today.