Out of all the places to put your money in, investing in your first home is one of the most important investments of your life.
So, it is totally understandable for you to be making smart decisions and learning more regarding housing loans in Singapore. Buying a house is one of the situations where taking a loan is necessary.
Choosing between a bank loan and an HDB loan is never an easy decision. Finding a loan that fits the bill for you depends somewhat on your personal preferences and financial situation.
Conflicted between a bank loan and an HDB loan? Well, in broad strokes, a bank loan is generally cheaper than an HBD loan in the long run, though HDB loans have their own perks which some prefer.
Before jumping to any conclusions you need to know what they both are and what is the difference between a bank loan and an HBD loan so that you can make an informed decision that’s best for you and your partner.
What Is A HDB Loan?
HDB Concessionary Loans, which are provided to Singaporeans, are loans that come with a down payment commitment of up to 10%. This is why they are easy on the pocket and you can pay the down payment by using funds in your CPF Ordinary Account (OA). The interest rate for an HDB loan is 2.6% for the rest of the tenure of your loan.
With the general assurance of lower interest rates with the availability of lower down payments, HDB loans have higher interest rates than the interest rates of mortgage loans from banks.
What Is The Eligibility For HDB Loans?
Couples may find an HDB loan attractive, especially the newlyweds because the down payment required is low, but there are a few restrictions and regulations that one needs to consider while or before applying for an HDB loan.
- While applying for an HDB loan, it is required for the buyer to not have any ownership of a private residence in Singapore, or outside of Singapore. That means that the buyer cannot have a condo, or a landed property under their name.
- To decide the eligibility of these loans, there is a monthly income ceiling. For those couples who want to acquire HDB loans, their monthly income should not exceed $12,000, and for families, it is $18,000.
- The income ceiling for a person is at $6,000 under the Single Singapore Citizen (SSC), while buying a 5-room or smaller flat, or a 2-room new flat in a non-mature area.
- If a buyer has already taken two previous HDB loans, then they won’t be eligible for any further HDB loans.
- When applying for an HDB loan, the loan officers check whether or not the buyer has been persuaded of private residential property in the last thirty months before the loan application. If they have, then their loan request is rejected.
How Does A HDB Loan Work?
A bank loan is fairly simple to understand while understanding the workings of an HDB loan is quite complicated.
A bank loan is an overall housing loan that is taken from the buyer’s choice of bank and is based on the bank’s interest rate packages presented; the loan application process, and the repayment process.
There are two main criteria that need to be met for an HDB loan. Specifically, these two criteria are the Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR). Both these requirements take into account the income and debt responsibilities of the borrower and as long as there is a good credit score or repayment history, it is simple to secure a bank loan for your HDB unit.
As you read before, monthly installments for an HDB loan can be processed through CPF or via cash as per your desire. And as long as you have the necessary funds in your CPF OA you are welcome to choose to pay your entire monthly installment through CPF.
Differences Between A HDB Loan & A Bank Loan
Based on the information that we went over so far, let us have a look at the basic differences between an HDB loan and a bank loan to compare them:
#1. Eligibility
There are citizenship and income requirements for HDB loans in addition to a bunch of other requirements to determine eligibility. For bank loans on the other hand, if you have low monthly debt obligations, a good credit score, and a stable monthly growth income of more than $2,500 then you are pretty much eligible for the loan.
What if you have a poor credit score?
The first step is to clear all of your debt. You can do so by taking on a personal loan with a fixed repayment plan to clear it. Punctual repayment will also tell the banks that you are responsible and reliable, increasing your loan approval rate.
#2. Monthly Installment
HDB loans have much steadier monthly installments seeing that the interest rate has much less unpredictability over a longer period of time.
Monthly installments for a bank loan are much more unpredictable over a long period of time due to either refinancing or repricing where interest rates and loan tenures can be changed.
#3. Down Payment Amount
At least 10% of the purchase price of the HDB unit is required as the down payment in HDB loans which can be paid in cash or CPF.
On the other hand, a 25% down payment is required in which 5% must be paid in cash in the case of bank loans.
#4. Maximum Loan Amount
You can take up to 90% of the purchase price in HDB loans. While the maximum loan quantum is 75% in bank loans.
#5. Minimum Loan Amount
No such minimum amount of loan in HDB loans. It is typically $100,000 for bank loans.
#6. Penalties
There is no lock-in period in HDB loans so, there are no such penalties applicable apart from late payment on a loan. Banks do have a lock-in period so the penalties typically range from 0.75% to 1.50% of your unpaid loan amount. This amount will generally apply if you choose to have an early repayment, refinancing, or sale of your HDB within the lock-in period.
HDB Loans VS. Bank Loans – The Verdict
Considering all the factors and your financial matters, the best-suited loan for you really depends on the kind of lifestyle that you lead in Singapore.
Go for an HDB loan if you are against taking risks, or if by any chance you are sure you can pay off the loan early. Taking an HDB loan is also useful if you are just getting started with your career. The down payment rate is lower on your house and as far as missed repayments are concerned, you have better chances with an HDB loan. Although the interest rate is high, it is less strenuous on your cash flow.
If you have a better understanding of the housing market, and you are well known on how to refinance your loan, a bank loan could be cheaper. With that, you must make sure to learn about all the terms and conditions before opting for a loan from a bank because banks are a lot less forgiving than HDB.
Also, you can switch from HDB loans to bank loans but not vice versa. With that being said, there is really no right or wrong here when it comes to finding the best home loan rates in Singapore. So technically, there is no uninterrupted fixed rate home loan in Singapore.
Everyone has a different case when it comes to finances. Which home loan you should consider depends on the background, your income, and the type of property you are interested in. Consider the above factors and make the decision that’s best for you.