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Will a HDB Housing Loan or Bank Loan Save me more money?

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Owning a flat is one of life’s milestones for many young Singapore couples. After all, Singapore is one of the countries with the highest home ownership rates at 91.7% in 2022. 

In Singapore, real estate is often seen as a tool for both investment and for residence. Many of us want the best of both worlds. It is not unheard of to hear couples upgrading to a bigger house as their income and family grow. And making a profit from the sale of their BTO.

We saw a bull’s run in the property market in 2021 last year. Where the low-interest rates have fueled the increase of property prices. 

If you are considering buying a home, or are waiting for your BTO to be built, you may want to understand how you can use CPF as a tool for payment. 

Choices of Mortgage – HDB Housing Loan or Bank Loan

Now that we have gotten the flat, we will have to work out its finances. 

No one is expecting you to pay off the whole flat with a suitcase full of cash. You have the choice of taking either a HDB loan or a bank loan. 

In Singapore, there are 2 different finance options available to buyers of Housing Development Board (HDB) properties. The HDB housing loan scheme or a bank loan.

While it is a common misconception that you can only use your CPF to pay for HDB Housing Loans. The fact is that CPF monies can be used to pay both HDB housing loans and bank loans.

Should I get a HDB housing loan or Bank Loan?

The main consideration of whether to take the HDB loan up is mainly due to the difference in interest rates. Other than that, there is also a difference in the initial down payment, as well as the criteria for HDB loans. 

HDB Housing Loan vs Bank Loan

1. Loan to Value (LTV) Limit and Down Payment

The minimum downpayment of a HDB loan is 15% while it is 25% for bank loans. This means that you can borrow more money with a HDB loan. 

Also, HDB loans allow you to pay your down payment fully using your CPF Ordinary Account (OA). While for bank loans, you can only use your CPF for 20% of the down payment and 5% has to be paid in cash. 

If you do not want to pay any cash downpayment, you can always start with a HDB loan and switch to a bank loan later. However, you cannot switch from a bank to an HDB loan.

2. Eligibility Conditions for HDB Housing Loans

HDB loans have certain restrictions such as the below:

  • At least one buyer must be a Singapore citizen
  • Buyers’ monthly income must not exceed $14,000 (or $21,000 for extended families and $7,000 for singles)
  • Buyers must not own any other local or overseas private residential property
  • Buyers must not have taken more than two previous HDB housing loans
  • Do not own more than 1 market/ hawker stall or commercial/ industrial property. And if you do own a market/ hawker stall or commercial/ industrial property, you must be operating the business there, and have no other sources of income.

The list above is not exhaustive, and homeowners can check with HDB for more information.

3. Interest Rates and Fluctuations

The interest rate for an HDB loan is currently 2.6%. And it has been 2.6% for a very long time. For a bank loan, there is a huge range of different loan packages to choose from. And the interest rates vary depending on the bank as well as the loan structure of your choice. 

In the current low-interest-rate environment, the bank loan interest rates of 1.2 to 1.5% may look a lot more attractive. But do keep in mind that they may fluctuate, and may become better or worse than HDB loan’s interest.

Bank loans have different loan structures, we have mainly fixed-rate home loans and floating-rate home loans. 

Fixed-rate home loans usually have a fixed rate of interest for 3 to 5-years. But beyond that, the rates will return to the floating rate, which may be prone to huge fluctuations. If you have a fixed rate home loan that has ‘expired’, consider refinancing your home loan and saving more money! 

Save Money by Refinancing your Mortgage with Property Guru

Whether you’re a new homeowner or an existing homeowner, choosing the right home loan with a low-interest rate will save you a significant sum of money.

I used Property Guru to refinance my home loan. And was able to compare the different banks to get the best rate. Refinancing helped to bring my monthly housing mortgage payment even down further to only 1.5%!

Many of us may procrastinate on refinancing our home loans due to the complicated process of refinancing. With Property Guru, refinancing is easy, effortless, and transparent.

I would recommend Property Guru to all new and existing homeowners when considering a bank loan.

Otherwise, you can choose to get a floating rate home loan to finance your HDB flat. Floating rates are pegged to reference rates (e.g. SIBOR, SOR, bank’s fixed deposit rate) that fluctuate according to the markets. Floating rates may be good in a low-interest-rate environment, or if we expect interest rates to fall. However, this will work against you in a high-interest rate environment or when rates are expected to increase.

4. Bank Fees and Late Payment Fees

How many times has your bank tried to add a late payment fee or annual charge to your credit card bill? Yes, they may do that for your home payments too.

Regardless of how fiscally responsible you are, there are times when things can get out of our control. Such as losing a job, getting ill, etc, which cause our delays in home payment loans.

On top of the late payment fees, banks also impose a very high rate of interest on the unpaid amount. As we know how compound interest works magic, the opposite is also true. A small amount of debt can roll to a bigger amount over time, causing one to owe more and more money. 

Also, when you default on your loan payments, it will negatively affect your credit score. Meaning that you may have more difficulties applying for future loans or credit cards until you build your credit score back.

5. Early Repayment

I believe that a mortgage is a ‘good loan’, as it has a low-interest rate. This means that the loan can be leveraged for other investments that can return a higher yield on return. And thus, should not be repaid early.

And there is also another camp of people who will have a peace of mind having no debt at all to their name. Early repayment also makes sense for folks who do not have investments that can beat the 2.6% interest rate. 

In this case, it is better to go with a HDB housing loan as there are no early repayment penalties. While it is up to 1.5% for bank loans if you are still within the ‘lock-in’ period.

Other FAQs

  • Can HDB Loan be Refinanced?

As mentioned earlier, home buyers can start with a HDB loan and switch to a bank loan later. However, you cannot switch from a bank to an HDB loan.

You can refinance your HDB loan with another Bank Loan. Once the Letter of Offer from the bank has been accepted, homeowners can submit it to HDB to apply for refinancing of housing loan. The refinancing will take about 6 to 8 weeks.

  • When Can I Switch from HDB to Bank Loan

You can switch over from a HDB loan to Bank Loan anytime. There are no lock-in periods for HDB housing loans.

  • When does HDB loan repayment start

Upon the loan, or collection of keys for new BTOs, the loan repayment will start on the first day of the second month. And will be payable on the first day of every subsequent months.

  • How can I pay my HDB housing Loan?

The most common way to pay for the HDB housing loan is through CPF OA. However, homeowners also have the option to use cash to do so. With cash, the payment options are GIRO, PayNow, NETS and internet banking.

Conclusion

If you ask me, my personal choice in the current low-interest rate climate is still a bank loan. In particular, a 3 to 5-year fixed-rate bank loan that still offers savings significant enough but does not stress you out by requiring you to look at the rates every quarter or so. 

That being said, there are others that may prefer a HDB loan. A HDB housing loan allows you to put less down payment for the property and deducts automatically from your CPF Ordinary Account (OA). Not forgetting that you probably won’t have to go through the hassle of comparing bank mortgage loans for the lowest interest rates.

Other than saving money on your HDB loans, you can potentially also save a big sum from your BTO renovations. And all these surplus can be used to fund other goals in life.

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Hello! Welcome to Her Wealth Journal!

I’m the Personal Finance Blogger who started a family at 24. And refuse to let this become an excuse for not getting my sh!t together.

At the Her Wealth Journal blog, I share the best money-saving tips, dividend growth investing, passive income ideas, and more. To help you to achieve the financially free lifestyle you’ve always wanted.

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