HDB Loan, bank loan, what’s the difference really?
by Ryan Ong
GETTING your first home loan is like getting back-alley Botox injections. You just want the cheapest option, the people involved don’t seem to speak English, and the end result is something you’ll regret for 25 years. The big question, for flat buyers especially, is why some people use bank loans, and some people use HDB loans. Maybe this will clear it up:
What’s the difference between bank loans and HDB loans?
The most obvious difference, which we’ll get out of the way right now, is that HDB loans can’t be used if it’s not a HDB property, like a condominium or terrace house. And in case you didn’t know, you can’t use HDB loans for Executive Condominiums (ECs) either (although first time buyers can still get CPF grants for ECs).
Now, the reason some people prefer one loan type over the other is:
- The initial down-payment is different
- The banks have been cheaper for a long time
- The banks haven’t been cheaper all the time
- HDB loan repayments don’t fluctuate as much
- The perception that HDB is more lenient
1. The initial down-payment is different
The main reason a lot of people pick HDB loans first is the down-payment. The bank has a maximum Loan to Value (LTV) ratio of 80 per cent, which is a really fancy way of saying they can lend you up to 80 per cent of the property value. HDB has a LTV of 90 per cent.
So if you are buying a $600,000 flat, HDB can lend you up to $540,000, whereas the bank can only lend you up to $480,000.
(Although neither the bank nor HDB is obliged to give you the maximum LTV.)
For HDB loans, assuming you get the full 90 per cent financing, you can pay for the remaining 10 per cent out of your CPF. Yes, this means you can potentially buy a flat without paying a single cent out of your wallet.
If you get the full 80 per cent financing from the bank, there’s still a 20 per cent down payment. Of this 20 per cent, 15 per cent can come from your CPF. The remainder has to be paid in cash.
So in the example of a $600,000 flat:
A HDB loan would mean $540,000 borrowed, $60,000 from your CPF, and $0 in cash.
A bank loan would mean $480,000 borrowed, $90,000 from your CPF, and $30,000 in cash.
2. The banks have been cheaper for a long time
The interest rate on the loan is different between banks and HDB. For HDB Concessionary Loans, the interest rate is always 0.1 per cent above the current CPF Ordinary Account (OA) rate. The CPF OA rate is revised every quarter, but changes about as often as a racist’s opinion on immigration. It’s been 2.6 per cent per annum for a long time, and still is.
Bank rates are based on a combination of two things: the bank’s spread, and a particular index. In most cases, the index is the Singapore Interbank Offered Rate (SIBOR).
In less common cases, the index used is the Swap Offer Rate (SOR), which changes with the strength of the US dollar. You may also see an offer to use an Internal Board Rate, which allows the bank to decide whatever the number should be.
Whatever the case, the typical interest rate on a bank’s home loan package has been around 1.7 to 1.9 per cent since around 2008/9. So yes, it is true that most people with private properties have paid a lower interest rate than HDB borrowers, for around seven years.
A lower interest rate means lower monthly repayments.
Now some borrowers have caught on to that, which led to them refinancing from a HDB loan into a bank loan. And yes, that’s something you can totally do, but you cannot switch back from a bank loan to a HDB loan later. Which matters because…
3. The banks haven’t been cheaper all the time
The historic interest rate for home loans in Singapore (for bank loans) is around three to four per cent. The reason they’ve been so low is because of the Global Financial Crisis, back in 2008/9.
In the aftermath of the crisis, the American Federal Reserve wanted to stimulate recovery. They did this by dropping their interest rate to zero, which drove down SIBOR and SOR rates here. Suddenly, the bank loans became much cheaper than their HDB counterparts, which continued to stay at a stubborn 2.6 per cent.
But remember that there are no perpetual fixed rates from Singapore banks. Almost all the bank loans are pegged to SIBOR or SOR, and those rates are going back up again. Back in 2015, the SIBOR rate jumped – and with America’s central bank looking to raise rates and “normalise” the economy, there’s a chance it will keep climbing in the coming years.
Now it’s not likely that the rates will leap back to the three or four per cent levels over night. But on the same note, borrowers will probably still be paying the mortgage 15 or 20 years from now, so that could be an issue to contend with later.
4. HDB loan repayments don’t fluctuate as much
Monthly repayments tend to stay predictable for HDB loans, as the CPF rate is not often changed. For bank loans, it determines on the interest rate period used.
Borrowers can often pick between a one month SIBOR rate or three month SIBOR rate (in rarer circumstances, you might see a six, nine, or 12 month SIBOR rate.) The interest rate period determines how often the monthly repayments are changed to match the prevailing SIBOR rate.
So a three month SIBOR rate means the monthly repayments are revised to match SIBOR every three months, and that’s when the monthly repayment will change. A one month SIBOR rate means the repayment changes every month.
This matters to some borrowers who pay for their mortgage in cash. Those who hate fluctuating rates may prefer HDB loans, even if it means paying more. Their only alternative, if they want predictable repayments, is to constantly move between fixed rate loans*.
Those who make mortgage payments via their CPF – which can be done for HDB or bank loans – may care a little less about this.
(*As stated earlier, there are no perpetual fixed rate packages. A fixed rate loan has unchanging monthly repayments for three to five years, after which it goes right back to being a floating rate. The only way to make it “perpetual” is to repeatedly refinance from one fixed rate loan into another.)
5. The perception that HDB is more lenient
Is HDB more lenient if you can’t make mortgage payments? It’s hard to say, because HDB’s treatment will vary on a case-by-case basis. Also, it’s a matter of individual perception (if you’re helped to, say, downgrade from your current flat, would you consider that leniency?)
Given HDB’s mission however, it’s safe to assume they’ll bend over backwards to help someone keep their house. That’s the common perception anyway, which is why a lot of borrowers stick with HDB.
In order to be fair, it should also be pointed out that banks seldom foreclose the second you miss repayments.
In fact, most banks avoid having to do that, because they might make a loss. They lose the interest they wanted to collect, and there’s no telling if your house will auction for a decent enough price. It’s common for banks to give borrowers up to a year, to find a willing buyer for their property.
All that being said, maybe a borrower who’s concerned about this shouldn’t be buying a house in the first place. If you’re already speculating on not paying the mortgage, then maybe it’s best to build up some kind of emergency fund first – whether you’re going with the bank or HDB.
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