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

One of the first financial decisions that Singapore families will have to make when buying a HDB flat is the type of housing loan to take.

In essence, we have two choices. We can opt for a HDB loan or a bank loan. But which should you opt for?

Until recently, more people were leaning towards taking a bank loan. That’s because interest rates over the past decade have been at historical lows. This means that in spite of the fact that a HDB loan is supposed to be a “concessionary housing loan”, it has been more expensive compared to a private bank loan.

However, with interest rates rising sharply in 2022—interest rates on bank loans shot past 3% for floating rate packages and above 4% for fixed rate packages—HDB loans are once again being favoured as the cheaper alternative with a stable 2.6% interest rate.

With interest rates expected to stay high for the time being, more HDB homebuyers are considering taking out a HDB loan. In this article, let us explain both the pros and cons of each option.

Eligibility Criteria For A HDB Loan

Before we go into the comparison, let’s first run through the eligibility criteria for a HDB loan.

> At least one buyer must be a Singapore citizen.

> Have not taken two or more HDB loans before (i.e. max two HDB loans).

> Monthly household income not more than $14,000.

> Must not have own or disposed of any private residential property in the 30 months before the date of application for an HLE letter.

You can find more details on the HDB website.

If you do not meet any of the above eligibility criteria, then the comparison doesn’t matter. Your only option will be to go for a bank loan.

Comparison

If you are deciding between a HDB loan or a bank loan, that means you intend to buy a HDB flat. Hence, all the regulations for buying a HDB flat apply. For example, for the first five years, you are required to live in it and cannot sell or rent the entire flat out.

We will make a reasonable assumption about the loan required for the homeowner.

Here are our assumptions.

Cost of flat: $400,000

Loan Period: 20 Years

Down payment: 25%

Loan Required: $300,000

Interest Rate: 2.60%

How Much More Will I Pay If I Take Out A Bank Loan Now?

The main reason for taking a bank loan is to enjoy lower interest rates. However, with interest rates rising, this is no longer the case. To understand how much you could potentially be paying, let’s take a look at the various types of interest rates you can expect to pay.

Most banks will offer interest rates tied to SORA or a Fixed Deposit Home Rate. Banks also usually offer attractive teaser rates for the first two to three years in order to entice potential customers.

Here’s a comparison between a HDB loan and bank loans based on actual rates that you can get from the three local banks today.

Cost of Flat: $400,000

Loan Required: $300,000 (25%)

Loan Duration: 20 Years

	Bank Interest Rate	Bank Loan	Total Interest	HDB Loan (2.6%)	Total Interest
DBS Home Loan [3M Compounded+1.00]p.a.*	3.56% [2.46+1.00]	$1,749	$119,793	$1,604	$85,047
OCBC Home Loan [3M Compounded+0.98]p.a.*	3.44% [2.46+0.98]	$1,731	$115,354	$1,604	$85,047
UOB HDB Loan [3M Compounded+0.70]p.a.*	3.16% [2.46+0.70]	$1,688	$105,101	$1,604	$85,047

To find out more about DBS Home Loan, check out their website

To find out more about OCBC Home Loan Packages, check out their website

To find out more about UOB HDB Loan, check out their website

Our comparison above is based on SORA home loan packages offered by the local banks and does not represent a recommendation on our part for these products. We have also used the promotional rates to calculate the 20-year loan term, which may rise after the initial lock-in period. Hence, this may not be a true reflection on the total bank loan interest incurred and rather is meant to serve as a simple comparison exercise.

Even after considering the current promotional interest rates, bank loans are still more expensive than HBD loans.

For example, the difference in interest payable between the current UOB Home Loan and a HDB loan is about $22,055 over a 20-year period, or about $92 per month.

It also goes without saying that the larger the sum of money you borrow and the longer the duration of the loan, the more enticing a HDB loan will be at the current interest rates.

Read Also: Here’s Why It Doesn’t Make Financial Sense To Repay Your HDB Flat Home Loan Early

What Are The Disadvantages Of Taking A Bank Loan?

Now that we have explained the financial implications of taking a bank loan, let us explain what some of the other disadvantages of taking a bank loan are.

# 1 Interest Rates Are Never Guaranteed

For those of you who don’t already know, interest rates offered by banks are (almost) never guaranteed past the lock-in period.

Even if you take a fixed loan package, the interest rates are only guaranteed for a period of time. After the “fixed” period, the interest rates become a floating rate. Most home loans interest rates are pegged to the SORA.

If you take a bank loan, be prepared that what you are paying now is unlikely to be what you will be paying in the long-term.

# 2 Constant Refinancing Or Repricing Fee

To constantly enjoy the advertised (i.e. lower) interest rate, you will need to keep refinancing or repricing your existing bank loan. This is typically done once every two to three years.

Repricing is cheaper than refinancing because it means sticking with your existing bank, while refinancing involves moving the housing loan to another bank.

As a general rule of thumb, you should reprice or refinance if it allows you to save more in terms of interest (over the next three years) than what it would cost you in legal fees.

At the same time however, it’s worth remembering that the actual savings that you derive from choosing a bank loan will be lower than expected because of the refinancing or repricing fee, even if interest rates somehow remain the same for the duration of the loan.

If you take a bank loan for 20 years, you should expect to refinance or reprice it about six times before the end of your loan. You should find out from your mortgage broker about the cost of refinancing or repricing, and add that to the savings that you think you are getting to see if a bank loan truly makes sense.

Read Also: Refinancing VS Repricing Your Home Loan: What Are The Differences?

# 3 Early Prepayment Fee

Most homeowners don’t realise this but there is an early repayment fee that applies if you sell your HDB flat within the commitment period for bank loans. The commitment period is typically the three years lock-in period that takes place after you refinance or reprice your loan.

For example, if you were to refinance your bank loan today and sell your HDB flat two years later, you will be liable to pay the early prepayment fee. This is typically about 1.5% of the remaining loan amount.

The workaround here is to NOT to refinance or reprice your home loan if there is a possibility that you will sell your HDB flat within the next three years. However, this also means missing out on the advertised interest rates that got you attracted to a bank loan in the first place.

Read Also: Home Loan Guide – Penalty For Early Repayment

# 4 Higher Downpayment

For HDB loans, the downpayment required is just 20% (payable by CPF). For bank loan, the downpayment required is 25%, of which at least 5% has to be paid in cash.

# 5 Once You Take A Bank Loan, You Can’t 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 can’t revert back to a HDB loan.

This is also one of the main reasons why we suggest for new homeowners to opt for a HDB loan first if they can. As and when you are convinced by the merits of opting for a bank loan, you can go ahead to switch again in the future.

Read Also: What A 1% Increase In Interest Rates Could Mean For Your Home Loan Repayment

# 6 Minimum Amount Required

Many people don’t realise this but most banks don’t allow you to take a loan if the loan amount is below $100,000. In general, this isn’t 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 thus, stuck with a loan that has an unfavourable interest rate. To avoid this, ensure that you refinance/reprice your loan just before it dips below $100,000 so that you are not stuck with a loan with a bad interest rate.

Which Would You Choose?

We hope that through this explanation, HDB homeowners will realise that simply opting for cheaper bank loans may not necessarily be better compared to HDB loans with slightly higher interest rates.

At the end of the day however, it’s up to individual homeowners to determine for themselves what makes the most sense, based on the plans that they have.

If you’d like to find the most suitable home loan among banks in Singapore, we have a guide to choosing the most suitable home loan. In this guide, we have discussed how the loan duration can affect your repayment, whether you should choose fixed or floating interest rates, and even the penalty for early repayment.

Read Also: Interest Rates Are Going Up. Should I Be Refinancing My Mortgage As Soon As Possible?

This article was first published on 9 April 2018 and has been updated with the latest information.

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