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6 Reasons You need to Still Choose An HDB Mortgage loan Over A Bank Mortgage loan (Even Though HDB Rates of interest Are Higher)
The majority of Singaporeans buy an HDB flat to reside in. In fact, HDB flats are the place to find over 80% of Singapore's resident population, and 90% of them own their HDB flat.
One of the most common questions we make a list of when purchasing an HDB flat is, obviously, what kind of federal government grants we're eligible for. Probably the next common query is whether or not we should choose an HDB Loan or a Bank loan.
Bank Home loan is Less expensive than HDB Home Loans
When discussing this, a lot of us may already know that bank mortgage loans offer better interest rates.
This is because banks tend to use the current interest rate environment like a gauge for that interest rates you pay. Many bank mortgage loan interest rates are presently hovering in the 1.2% per year mark.
On another hand, the HDB home loan is pegged to charge 0.1% greater than the interest rates paid on our CPF Ordinary Account. This means we currently pay 2.6% per year on our HDB home loan (because the CPF Ordinary Account happens to be paying 2.5% per annum).
Since bank home loan interest rates are less costly, why would anyone still choose an HDB mortgage loan then? We give you 6 reasons why an HDB home loan is much better.
#1 Forking Out A More Affordable Downpayment
We need to consider the Loan-to-Value (LTV) limit when purchasing the house in Singapore. The LTV limit may be the maximum home loan you could get when choosing your HDB flat. You can spend the money for remaining amount in a combination of cash and CPF.
When taking an HDB mortgage loan, our LTV limit is 90% – which means we have to pay the absolute minimum downpayment of 10% on our HDB flat. However, the LTV limit for any financial loan is 75%, when means we have to spend 25% of the house price in cash and/or CPF.
For example, during the latest bumper BTO launch in August 2021, 4-room flats ranged from $253,000 (cheapest 4-room flat in Chua Chu Kang) as much as $617,000 (priciest 4-room flat in Geylang).
When taking an HDB home loan, we need to pay $25,300 and $61,700 respectively for that downpayment on our HDB flat. However, when we choose a bank mortgage loan, we have to fork out $63,250 to $154,250 for the same flats. This can be unaffordable for many couples, particularly if we are just starting out within our career.
#2 Paying Our Downpayment Entirely In CPF Savings
As discussed in the previous point, we have to fork out a downpayment worth 10% of our flat price if we are utilizing an HDB home loan and 25% of the purchase price as using a bank mortgage loan.
How we spend this amount could be in a combination of cash and CPF Ordinary Account (OA) savings.
When utilizing an HDB mortgage loan, we are able to fork out the entire 10% from the purchase price from your CPF OA savings. However, if we are using a bank home loan, we have to pay at least 5% from the downpayment in cash, while the remaining amount can be paid in cash and CPF OA savings.
Taking the above mentioned example again, for a $253,000 (cheapest 4-room flat in Chua Chu Kang) along with a $617,000 (priciest 4-room flat in Geylang), we are able to pay the entire 10% or $25,300 and $61,700 respectively in CPF savings as taking an HDB home loan. Note that the particular amount might be lower due to housing grants which go towards make payment on downpayment.
If we are utilizing a bank home loan, we must pay 5% of the cost in cash for that downpayment. All of those other funds can be from our CPF OA savings, cash or housing grants.
#3 Non-Guaranteed Rates of interest On Bank Home Loans
While bank home loan rates are less costly today and appear like they will continue to be less expensive than HDB home loan rates within the coming years, this is not guaranteed.
Let's assume we purchased a home in 2000 and took a bank home loan paying 3-month SIBOR + 0.85%. This is what our loan would look like compared to an HDB mortgage loan.
| Year | Interbank 3-Month SIBOR | Bank Home Loan
(SIBOR + 0.85%) |
HDB Home Loan |
| 2000 | 2.50% | 3.35% | 2.6% |
| 2001 | 2.75% | 3.60% | 2.6% |
| 2002 | 1.19% | 2.04% | 2.6% |
| 2003 | 0.81% | 1.66% | 2.6% |
| 2004 | 0.75% | 1.60% | 2.6% |
| 2005 | 1.50% | 2.35% | 2.6% |
| 2006 | 3.25% | 4.10% | 2.6% |
| 2007 | 3.44% | 4.29% | 2.6% |
| 2008 | 2.38% | 3.23% | 2.6% |
| 2009 | 1.00% | 1.85% | 2.6% |
| 2010 | 0.69% | 1.54% | 2.6% |
| 2011 | 0.44% | 1.29% | 2.6% |
| 2012 | 0.38% | 1.23% | 2.6% |
| 2021 | 0.38% | 1.23% | 2.6% |
| 2021 | 0.40% | 1.25% | 2.6% |
| 2021 | 0.58% | 1.43% | 2.6% |
| 2021 | 1.19% | 2.04% | 2.6% |
| 2021 | 0.97% | 1.82% | 2.6% |
| 2021 | 1.50% | 2.35% | 2.6% |
| 2021 | 1.89% | 2.74% | 2.6% |
| 2021 | 1.77% | 2.62% | 2.6% |
| 20-Year Average | 2.38% | 2.6% | |
If i was about this bank home loan rate, we would have saved some cash, but because we can see, the eye rates may not be exceptional. Of course, we can typically get preferential rates for repricing or refinancing, which may provide us with an even bigger saving.
Bank home loan is also not guaranteed, as they can change which rates they want to peg to (usually SIBOR or SORA) and how much premium they will charge over it.
Do note that HDB rates on mortgages rising, while not guaranteed either, will always be 0.1% greater than the interest returns we earn on our CPF OA savings.
#4 Constantly Needing to Refinance Or Reprice
As mentioned above, when we simply stick to the bank home loan rate, we might 't be getting a great deal. What this means is having to refinance or reprice is a vital element in getting bigger savings on our bank mortgage loan.
This means constantly having to go with the procedure for finding the right or cheapest bank home loan rate in the market every 3 years. Missing several months will definitely cost us quite dearly, as you can see from the table above.
Another problem with constantly having to refinance or reprice is that we have to pay a financing cost. We need to constantly calculate whether it is going to be cost-saving for us to refinance or reprice our bank home loan.
Finally, whilst not a common situation, to use a bank home loan rather than an HDB mortgage loan, we typically have to take financing amount more than $100,000. This might not impact us at the beginning of our home loan, but in the tail-end whenever we have a bank home loan of under $100,000 it will be impossible to refinance or reprice, leaving us spending a potentially bad mortgage loan rate – whatever it may be at that point.
#5 Fees For Pre-Payment
Another kind of fee many of us may don't consider is the fact that banks will change us a pre-payment fee when we sell our HDB flat and cut short our bank mortgage loan inside our lock-in period (where we could receive the preferential home loan rates).
One method to work-around this really is to not refinance or reprice while we are seeking to sell (when we have past the 3-year lock-in period). During this period, we might have to fork out a slightly higher home loan rate.
If we're on the HDB mortgage loan, we do not need to worry relating to this pre-payment fee.
#6 You Can Make Utilization of HDB Enhanced Contra Facility To buy your Second HDB Flat
One lesser-known advantage of while using HDB mortgage loan is always that you can utilise the HDB Enhanced Contra Facility to buy your second HDB flat. This contra facility allows you to sell your overall HDB flat and also at the same time, buy another HDB flat using the sale proceeds and refunded CPF monies. Essentially, it is an additional loan that produces the shortfall in funds if you're awaiting the sales proceeds of the existing flat to pay for the purchase of the next flat and reduces your cash outlay.
This Is Not To Convince You to select The HDB Home Loan
By highlighting valid reasons to continue choosing an HDB home loan though it may be more costly, we're just trying to shine some light on potential advantages we might overlook in our quest for lower interest rates.
At the end of your day, we must choose a home loan that makes probably the most sense for us, having considered the pros and cons. This could still be a bank mortgage loan.
