Should You Get A Bank Loan For Your HDB Flat?

Written by Shannon Wong on October 29, 2022

Making the choice between a HDB loan and a bank loan for HDB is never easy. When you are making the decision that best suits you, your financial status will be an important factor.

When compared to bank loans, HDB loans require a smaller downpayment.

In addition, you are free to use your CPF for the entire downpayment. A HDB loan also has a fixed interest rate to enable regular repayments.

This is helpful for making financial plans for the future.

But if you are not on a tight budget and have extra money on hand for the downpayment, a bank loan for HDB is an option.

Because of the significantly lower interest rate and lower LTV, you will be able to use more of your savings.

This detailed article will help you in choosing a bank loan or HDB loan.

What To Know About A HDB Loan

The Housing & Development Board (HDB) offers a HDB loan, which you can only use to buy a HDB flat.

This loan is not an option if you want to purchase a private residence. But you can apply for a bank loan for HDB.

Your age, monthly income, and financial situation all play a role in determining the housing loan amount for a HDB loan.

If you buy an unfinished apartment directly from HDB, it will evaluate your financial situation just before the apartment is finished.

You need a HDB Loan Eligibility (HLE) letter  in order to find out how much you are eligible to borrow.

You also have six months from the date of the letter to submit your application after which you will have to get another one when the first one expires.

The maximum repayment period for HDB loans is 30 years, or until the buyer reaches the age of 65 – or the amount of the lease that was still outstanding at the time of application is less than 20 years, whichever is shorter.

The HDB interest rate is set at 0.1% more than the current interest rate for the Ordinary Account (OA) of the Central Provident Fund.

Eligibility Criteria

You have to meet the below requirements for applying for a HDB loan in Singapore:

  • At least one applicant for the HDB has to be a Singapore citizen
  • You must have a HLE letter
  • You shouldn’t have gotten two HDB mortgage loans. You cannot apply for a third HDB loan. Your last property cannot be a private residential property if you have taken out a single HDB housing loan
  • In the previous 30 months, you must not have owned or sold any private residential property
  • For an average family, the average gross monthly income must be under $14,000, and $21,000 for an extended family
  • For singles purchasing a two-room new apartment in a non-mature estate, or a five-room or smaller resale apartment, the average gross monthly household income must be less than $7,000

Pros And Cons Of A HDB Loan

There are advantages and disadvantages to selecting a HDB loan over a bank loan.

20% of the purchase price must be paid as a downpayment, which a CPF payment can fully coverHas a higher interest rate of 0.1% above the interest rate of the CPF OA
Your loan limit is up to 80% of the buying priceHigher LTV, combined with a higher interest rate, would result in an expensive home
Its interest rate is less prone to fluctuations because it is tied to the CPF OA interest rate
You can opt for flexible refinancing as it doesn’t have a lock-in period
You can pay off the loan early without incurring any penalty fees

Bank Loan Eligibility Criteria

The first thing you should do before applying for a HDB loan or bank loan is to check if you qualify for one.

For a bank loan, there are no restrictions as outlined above for HDB.

However, your eligibility may be affected if you have a low credit score or bad repayment record. Here are some bank loan requirements;

  • A minimum annual income of $24,000 or a total annual income of $36,000 is required of the applicant(s).
  • Your bonuses, commissions, overtime, and other income sources may be taken into account at the bank’s discretion
  • Most lenders set 21 years as the minimum age requirement
  • The maximum age of the applicant should be 65 years

Pros And Cons Of A Bank Loan

Banks and other private financial institutions, such as money lenders, also offer housing loans.

If you do not qualify for a HDB loan, you may try applying with them. Here are the pros and cons.

Lower interest rate package than HDB loansYour ability to repay a bank loan early is restricted by the lock-in period, and will result in an early repayment penalty of 1.5% of the loan balance
You can renegotiate your mortgage for the lowest interest rates availableA downpayment of up to 25% of the purchase price is required. Out of which, at least 5% must be paid in cash
Fewer application restrictions (e.g. no income ceiling conditions)During the mortgage period, switching to a HDB loan is not possible
The maximum bank loan for HDB depends on your Mortgage Servicing Ratio (MSR)Interest rates are inconsistent and constantly changing in response to market changes

Key Differences Between A HDB Loan And Bank Loan

While HDB and bank loans are viable options for Singaporeans looking to own a home, there are significant differences between the two.

Depending on your financial situation, you may find that one meets your current needs better than the other.

      1. Interest Rate

The current HDB loan interest rate is 2.6%, and it rarely changes.

However, the interest rate for a HDB loan is based on the current Singapore Overnight Rate Average (SORA) rates, which are more expensive and volatile.

Banks also provide a wide range of home loan packages with various floating rates.

Consequently, with a fixed loan package, you can benefit from a two- to three-year interest rate guarantee. After the agreed period, the applicable rate will then be determined by the market at that time.

      2. Downpayment

For a HDB loan, a 20% minimum downpayment is needed. The LTV ratio for a HDB loan was lowered to 80% on 30 Sep 2022.

You may use CPF to fully pay the downpayment if you have enough money in your OA.

Bear in mind that CPF balances are a factor in the 80% limit.

Your CPF Ordinary Account balance must be cleared by HDB to a maximum of $20,000. This means that if you have a huge CPF balance, you might not be able to get a 80% LTV loan.

If you get a bank loan for HDB, you will have to pay much more upfront.

The initial HDB bank loan downpayment is 20%, of which 5% must be paid in cash. You should be prepared to spend around $15,000 for even a modestly sized unit.

      3. Loan-To-Value (LTV) Limit

As a result of the new property cooling measures in Singapore, the LTV for HDB loans is currently at 80% as of 30 Sep 2022, enabling you to borrow a sizeable sum.

Getting a bigger loan might seem advantageous, but you might end up paying more interest overall because of it.

Bank loans, however, only cover up to 75% of the cost of the purchase. Because of the 10% difference, you will have to make a bigger downpayment out of your own pocket, especially if you don’t have a lot of CPF savings.

      4. Lock-In Period

The lock-in period in Singapore is two or three years for banks. If you want to pay off your loan sooner, you will be charged a penalty of about 1.5% of the loan amount during this time.

For HDB loans, there is no lock-in period, so there won’t be any fees if you decide to pay the loan off early.

This means you can always refinance your loan with a bank if you want to take advantage of lower interest rates.

However, you won’t be able to switch back to a HDB loan after refinancing your HDB loan with a bank.

     5. HDB Refinancing

The advantage of taking out a HDB loan is that if you change your mind, you can refinance to a bank loan. This is because a HDB loan does not have a lock-in period.

However, there is no way to refinance a HDB loan if you take out a bank loan. If you want to opt for refinancing, you can only refinance with other banks or with the same bank.

Why The TDSR And MSR Matter

The Total Debt Servicing Ratio (TDSR) limits how much of your gross monthly income can be committed to paying debts. It applies to all loans in Singapore.

The Mortgage Servicing Ratio (MSR) restricts your monthly repayments to 30% of your gross monthly income. It only applies to loans for HDB flats and executive condominiums.

As long as you are purchasing a HDB flat, the MSR applies whether you choose a HDB or bank loan.

The maximum you can commit for your HDB flat is still 30% even though you might not have used your TDSR of 55% of your gross monthly income. If your MSR is greater than 30%, you may:

  • Extend the home loan repayment period
  • Reduce your other property repayments
  •  Lower the amount to borrow by paying more downpayment

Weigh The Pros And Cons Of A Bank And HDB Loan

It’s difficult to determine whether a HDB loan or bank financing is best.

They both have advantages and disadvantages in addition to other factors to consider. The better question to ask might be: Which drives you more – cost savings or convenience?

Despite having higher interest rates, HDB loans are flexible and only require a small downpayment.

Therefore, a HDB loan is your best option if you don’t mind spending a little extra money on interest to avoid the limitations of bank loans.

However, even with stringent requirements and a higher downpayment, choosing a bank loan is an alternative if you want a lower interest rate to save money in the long run.

A great first step to securing a family home is to own a HDB flat.

Should you want to apply for a loan, 1AP Capital is a trusted licensed money lender that will offer you an alternative to a HDB loan.

Contact us now or apply for a loan with us using your Singpass today. It just takes five minutes.

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