What You Need To Know Before Taking The Second HDB Concessionary Loan

Compared to a bank loan, an HDB concessionary loan has become more attractive in recent months as interest rates start to climb in Singapore. Bank home loan rates, which were on average under 1.5% at the start of 2022 for both the fixed and SORA-pegged floating packages, have in recent months climbed sharply to above 2.5%.

HDB housing loans, unlike bank loans, are less sensitive to the volatile market interest rates and are instead pegged at 0.1% above the prevailing CPF Ordinary Account (OA) interest rate. Currently, the HDB loan interest rate is at 2.6%. Therefore, an HDB loan offers homebuyers stability on their mortgage repayments as interest rates are fixed at the pegged rate throughout their loan tenure.

While the rising trend of interest rates has brought HDB loans back into favour with homebuyers, there are certain shortcomings when taking an HDB loan. For example, you can only take the HDB loan package twice, regardless of whether you use it to purchase a BTO or resale flat.

Beyond this, what most people may not realise about HDB loans is that they may not qualify for a similar loan-to-value (LTV) limit for their second HDB loan. This could inadvertently affect their purchase consideration or may have other cash-related implications.

Hence, it becomes crucial to understand the terms of taking a second HDB loan so that you can use your two HDB loan chances effectively.

Taking Your First HDB Loan At A 85% Loan-To-Value (LTV) Limit

HDB loans are issued based on the financial ability of flat buyers to service the mortgage payments, taking into account their age, monthly income, job stability, current loans and financial commitments, past repayment records, and monthly cash savings.

HDB loans are also capped at a maximum of 25 years, or up till the buyer is 65 years old or the remaining lease of the flat minus 20 years; whichever is the shortest. In comparison, for bank home loans, you can borrow up to 30 years for HDB flats, though the loan-to-value (LTV) could be reduced to 55% of the property purchase price.

Moreover, whether it is for HDB loans or bank home loans, the mortgage servicing ratio (MSR), which is the portion of the flat buyer’s monthly income that is used for the HDB flat’s mortgage repayment, is capped at 30% of the flat buyer’s monthly income.

What makes HDB loans attractive is that flat buyers would be able to get up to 85% LTV on their first HDB loan for the purchase price of a BTO flat. And, if it’s a resale flat, then the LTV is based either on the resale price or the flat value, whichever is lower. On the other hand, the maximum LTV for bank home loans is only up to 75% of the purchase price of the property.

The higher LTV for HDB loans is a major factor for most first-time flat buyers to choose it over bank loans.

Read Also: Here’s Why It Makes Sense To Take The Maximum HDB Home Loan You Can When Buying Your First Flat

LTV Limit For The Second HDB Loan Is Based On The Profits On Your Previous HDB Sale

For some of us, our first HDB property might not continue to serve our needs as our family size grows or if there’s a change in our requirements for various reasons. Hence, this may make us want to upgrade to a bigger HDB flat type or simply move to another HDB flat.

Depending on the interest rate environment, we may want to take on a second HDB housing loan. However, the loan amount for your second HDB loan would be reduced by the full CPF refund and part of the cash proceeds from the disposal of the existing or last-owned HDB flat. HDB states that this lowered loan quantum is to promote financial prudence and prevent over-borrowing.

To elaborate more regarding the cash proceeds, flat buyers are generally able to keep the greater of $25,000 or 50% of the cash proceeds (including the cash deposit received). Furthermore, HDB would take into account the remaining cash proceeds when determining the second HDB loan amount.

Simply put,

Scenario 1: If your cash proceeds amount to $25,000 or less, you could keep the full amount.

Scenario 2: If your cash proceeds amount to $40,000, you could keep up to $25,000 since 50% of $40,000 would amount to $20,000. The remaining $15,000 would have to be used for the purchase of the second property before financing could be determined by HDB.

Scenario 3: If your cash proceeds were $100,000, you could only keep up to $50,000, which is effectively 50% of the cash proceeds. Therefore, for cash proceeds of $50,000 and above, you have to use half of the proceeds, which is greater than $25,000, for the purchase of the second property before financing can be determined by HDB.

Thus, a flat buyer would end up having to use more of their “profits” for the purchase of their second HDB flat, whether they prefer it or not, should they take up a second HDB loan.

Read Also: HDB Or Bank Loan: Pros & Cons To Consider Before Deciding On Which Housing Loan To Take

What Are The Implications For Flat Buyers When They Want To Use HDB Loan?

Most flat buyers may place a large weightage on the interest rates when deciding whether to choose a bank loan or an HDB loan. However, as we will explain below, there are other more important factors that should be considered with equal importance by flat buyers.

These factors would come into play based on whether the flat buyer intends to hold on to their first HDB throughout their lifetime or whether they intend to sell and upgrade to another HDB flat later on.

Assuming that the flat buyer does intend to upgrade, then these are some of the implications to consider when taking an HDB loan.

Lower Loan Amount When You Need It More The Second Time

The purchase of our first residential property could be one of our biggest financial decisions given the large sum of investment. Yet for many of us, our first home could also be a BTO flat, which may come with large subsidies in the form of housing grants. This could help us to reduce our initial outlay and overall cost of the property purchase.

Yet at the same time, we may also feel uncertain about our ability to finance the mortgage repayments and worry about the interest rate fluctuations. This may lead us to assume that taking the HDB loan would be the best option. On the contrary, this may not be a critical juncture to use the HDB loan as the size of the first property loan might be rather small. This is especially true if you intend to eventually upgrade to a larger HDB flat.

You could end up using your higher LTV HDB loan option when you least need it and have to instead rely on a lower loan quantum when you really need a bigger loan size to finance the property upgrade, which would be priced much higher.

First HDB Loan Might Be Used For A Shorter Duration Than Your Second Loan

It is also ineffective to use the HDB loan for your first HDB flat if you do not intend to stay in that property for the full duration of your loan tenure, which could be as long as 25 years. One of the key benefits of using an HDB loan is that it offers stability in interest rates for the full loan tenure, something that a typical bank loan may not be able to offer.

Therefore, if our second HDB property purchase was meant to be our final property or one that we intended to stay in for the longest time, then it would make more sense to use our first HDB loan option for our second HDB property instead of our first. This would allow us to benefit from a potentially longer period of stable concessionary interest rates.

If you are looking to buy a residential property, consider using a good, trusted broker like our friends at RedBrick. Not only can they help you get the best rates out there, but the service is free since brokers like them receive their commissions from the banks. Simply fill in the contact form and an experienced Redbrick mortgage specialist will be in touch with you for a non-obligatory consultation. 

Little Flexibility On The Use Of CPF OA Funds

Lastly, we may also want to consider carefully when deciding to use an HDB loan on our first property, particularly if it is a BTO flat. The general understanding is that BTO flats would generate healthy profits for the first-time buyer as they are usually priced lower than the current market value of existing resale flats around the area. This “profit” may result in lowering the loan quantum for the second property purchase by as much as 50% of the cash proceeds.

Furthermore, aside from the first $20,000, you would also be required to use up your CPF OA savings and refunds that were previously used to finance the first property for the purchase of the second HDB property. This may affect your retirement planning if you prefer not to use up your OA savings to finance your second HDB purchase.

Alternatively, if you had used a bank loan for your first HDB property, though your LTV would have been lower at 75% of the property purchase, you would have had more freedom to decide how to use your cash proceeds and may even have chosen to transfer your OA savings to your Special Account (SA) or make other investments with your OA funds before taking out the first HDB loan for your second HDB property. This way, you could have greater flexibility with your OA funds than you would otherwise not have had you chosen to use a HDB loan for your first property.

Read Also: Taking A HDB Housing Loan: Should You Keep More Than $20,000 Or Let Your CPF OA Be Wiped Out

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