One common problem that faced by every home buyer when buying a property in Singapore is the choice between HDB home loans and bank loans. Today, the number of HDB apartments are growing in Singapore for example in Bukit Panjang. Many Singaporean couples or younger generations who start buying their HDB apartment often get surprised when they learn that banks charge much lower interest rates than HDB loans. Let’s take a closer look at the key differences between HDB loans and bank loans and which one is better.
- HDB loans have higher interest rates than bank loans
One of the main and key differences between the two is the interest rate. HDB Concessionary Loans have a very simple formula as the interest rate is the prevailing CPF Ordinary Account (OA) interest rate, plus 0.1%. This comes to about 2.6% per annum, a rate that has remained unchanged for a long period. As mentioned, the HDB loan interest rate is 2.6%, and rarely changes. Bank rates are more inconstant because they are based on current SIBOR and SOR rates, which are usually cheaper. Bank interest rates normally range between 1.6% to 2.05%. Therefore, it is true that the banks are able to offer a lower initial advertised interest rate compared to the HDB loan. If homeowners are confident to secure this advertised interest rate for the duration of the loan period, then a bank loan will certainly be better than a HDB loan.
- Down Payment
For HDB loans, the down payment required is just 10% which is payable by CPF. For bank loan, the down payment required is 20%, of which at least 5% has to be paid in cash. Therefore, for those who lack of cash in hand may choose HDB loans as it requires less cash.
- Once You Take A Bank Loan, You Cannot Switch Back To A HDB Loan
One of the important thing to be taken into consideration is that once you take a bank loan, you cannot switch back to a HDB loan. As opposed to taking a HDB loan first, where you can still convert to a bank loan in the future, taking a bank loan for your property is a one-way decision, you cannot revert back to a HDB loan. Thus, we advise new homeowners to opt for a HDB loan first if they can. As and when you are persuaded by the merits of opting for a bank loan, you can go ahead to switch again in the future.
- Minimum Amount Required
Many people do not realize this but most banks do not allow you to take a loan if the loan amount is below $100,000. In general, this is not a big issue if you are applying for a new loan, since you would not be able to take the loan anyway. The danger here is when you are unable to refinance or reprice your loan once it falls below a certain threshold, and are hence, stuck with a loan that has an uncomplimentary interest rate. To escape from this, make sure that you refinance or reprice your loan just before it slopes below $100,000 so that you are not stuck with a loan with a bad interest rate.
Which is better ?
If you have only little budget, HDB loans should be considered first, because there is a smaller cash outlay. If you discover the interest is too high, you can always refinance or switch from an HDB loan to a bank loan later, but not the other way around. If you plan to upgrade fast by selling the flat and buying private as soon as you can, you may want to consider a bank loan, or quickly refinancing into a bank loan from an HDB loan. The reason is that it could reduce monthly repayments, and minimize the interest eating into your resale gains.
We hope that through this explanation, HDB homeowners will realized that simply choosing for cheaper bank loans is not necessarily better compared to HDB loans with slightly higher interest rates. However, at the end of the day, it is up to individual homeowners to determine for themselves what makes the most benefit to them, based on the plans that they have.