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Bank Loan and HDB Loan, Which is Better For You?


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Bank Loan vs HDB Loan


Introduction

Whether to take up a bank loan or a HDB loan is a common question that many people will ask when they want to purchase HDB flats. However, it depends on the mortgagor's risk appetite, preference and financial situation.


Direct Comparison

The table below shows a summary of the bank loan and HDB loan for an easy and direct comparison.


bank loan vs hdb loan

Bank Loan vs HDB Loan


Selecting Based on your Risk Appetite

In a quick summary, the main difference and the decision making factor for most people is the interest rate between the two types of loan. HDB loan has a fixed rate at 0.1% above the CPF interest rate. Currently, the HDB loan interest rate is 2.6%. HDB loan also has much more stringent conditions for its application.

On the other hand, the interest rate for bank loan changes over time. Even for a fixed interest loan, it is only fixed for a certain amount of years, and it will switch to variable interest rate after that. Bank loan is also more volatile as the interest rate will adjust based on the economy and external influences while HDB loan is stable. Be prepared for fluctuating monthly payments in when economy is volatile.


Selecting Based on Financial Condition

HDB loans allow up to 90% loan while bank loans only allow up to 75% loan of the lower of valuation or purchase price. In addition, HDB loan allows 10% CPF to be used while bank loan has a minimum 5% cash down payment. If a buyer lacked cash at the moment but has steady stream of income, then they only need to pay the option fee and exercising fee of $5,000 in total to purchase a house (assuming that there is no COV).


Preferences

Taking up a HDB loan will automatically drain a portion of your CPF OA account (can keep up to $20,000 per person in the CPF OA, but the remaining will have to be used) while taking a bank loan allows you to choose how much you want your monies in CPF OA account to be used. This is because HDB encourages buyers to take up lesser loan amounts, especially towards retirement. On the other hand, banks will want buyers to take up a higher loan quantum as their primary business in mortgages is to profit from the interest rates.

While the maximum repayment period is the same for the 2 loans, the bank loan can be stretch above 25 years (HDB loan maximum repayment period) with a lower Loan-to-Valuation (LTV) Limit. This is suitable for younger couples who have many years ahead to stretch the loan so that the amount of monthly payment is less.

For buyers that want to use the Contra Payment Facility, then they will have to take the HDB loan.

When doing an assessment on the buyer’s income for HDB loan, HDB uses a Mortgage Service Ratio (MSR) of 30%. HDB will only take 30% of the total income to pay for the monthly repayment to determine the total mortgage amount. HDB will not ask on other types of loan that you may have and will stick to the MSR. On the other hand, if a buyer is taking a bank loan, the assessment will use the lower derived income from MSR or the Total Debt Servicing Ratio (TDSR). The calculations in the TDSR framework include a few types of loan that may cause the derived income to be lower than the calculation from MSR framework. For more information on MSR and TDSR, please click here.

HDB loan allows refinancing to a bank loan while bank loan cannot be refinanced to a HDB loan.


Minimum Cash

Please note that for bank loans, while the downpayment is 20%, the minimum cash required is different for different loan ceiling. If the loan ceiling is 75%, the minimum cash required during downpayment is 5% of the purchase price. If the loan ceiling is 55%, the minimum cash required during downpayment is 10% of the purchase price. We believe that if the loan is eventually more than 55% of the purchase price, it will follow the rules when loan ceiling is 75% (5% of the purchase price minimum cash in downpayment). If the loan is eventually less than or equivalent to 55% of the purchase price, it will follow the rules when loan ceiling is 55% (10% of the purchase price minimum cash in downpayment). A HDB loan has no minimum cash requirement in the downpayment as long as the CPF OA is sufficient.


Conclusion

We hope this article helps you in making a decision to take up one of the loan before you start hunting for your HDB flat.



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Bank Loan Vs HDB Loan


Introduction

Whether to take up a bank loan or a HDB loan is a common question that many people will ask when they want to purchase HDB flats. However, it depends on the mortgagor's risk appetite, preference and financial situation.


Direct Comparison

The table below shows a summary of the bank loan and HDB loan for an easy and direct comparison.


bank loan vs hdb loan

Bank Loan vs HDB Loan


Selecting Based on your Risk Appetite

In a quick summary, the main difference and the decision making factor for most people is the interest rate between the two types of loan. HDB loan has a fixed rate at 0.1% above the CPF interest rate. Currently, the HDB loan interest rate is 2.6%. HDB loan also has much more stringent conditions for its application.

On the other hand, the interest rate for bank loan changes over time. Even for a fixed interest loan, it is only fixed for a certain amount of years, and it will switch to variable interest rate after that. However, at this point of time, the market interest rate for housing loan is lower than that of the HDB loan interest rate, which makes it popular for some groups of people. Market interest rate is quite volatile and may increase or decrease the amount to be paid per month by a significant amount. If you decide to take up a bank loan, you will have to bear in mind that you may have to pay more on some periods when interest rate increases. Consequently, HDB loan has more certainty and less risk while bank loan has higher uncertainty.


Selecting Based on Financial Condition

HDB loans allow up to 90% loan while bank loans only allow up to 75% loan of the lower of valuation or purchase price. In addition, HDB loan allows 10% CPF to be used while bank loan has a minimum 5% cash down payment. If a buyer lacked cash at the moment but has steady stream of income, then they only need to pay the option fee and exercising fee of $5,000 in total to purchase a house (assuming that there is no COV).


Preferences

Taking up a HDB loan will automatically drain a portion of your CPF OA account (can keep up to $20,000 per person in the CPF OA, but the remaining will have to be used) while taking a bank loan allows you to choose how much you want your monies in CPF OA account to be used. This is because HDB encourages buyers to take up lesser loan amounts, especially towards retirement. On the other hand, banks will want buyers to take up a higher loan quantum as their primary business in mortgages is to profit from the interest rates.

While the maximum repayment period is the same for the 2 loans, the bank loan can be stretch above 25 years (HDB loan maximum repayment period) with a lower Loan-to-Valuation (LTV) Limit. This is suitable for younger couples who have many years ahead to stretch the loan so that the amount of monthly payment is less.

For buyers that want to use the Contra Payment Facility, then they will have to take the HDB loan.

When doing an assessment on the buyer’s income for HDB loan, HDB uses a Mortgage Service Ratio (MSR) of 30%. HDB will only take 30% of the total income to pay for the monthly repayment to determine the total mortgage amount. HDB will not ask on other types of loan that you may have and will stick to the MSR. On the other hand, if a buyer is taking a bank loan, the assessment will use the lower derived income from MSR or the Total Debt Servicing Ratio (TDSR). The calculations in the TDSR framework include a few types of loan that may cause the derived income to be lower than the calculation from MSR framework. For more information on MSR and TDSR, please click here.

HDB loan allows refinancing to a bank loan while bank loan cannot be refinanced to a HDB loan.

There are also small differences in the legal fees between ban loan and HDB loans but the amount is not significant.


Minimum Cash

Please note that for bank loans, while the downpayment is 20%, the minimum cash required is different for different loan ceiling. If the loan ceiling is 75%, the minimum cash required during downpayment is 5% of the purchase price. If the loan ceiling is 55%, the minimum cash required during downpayment is 10% of the purchase price. We believe that if the loan is eventually more than 55% of the purchase price, it will follow the rules when loan ceiling is 75% (5% of the purchase price minimum cash in downpayment). If the loan is eventually less than or equivalent to 55% of the purchase price, it will follow the rules when loan ceiling is 55% (10% of the purchase price minimum cash in downpayment). A HDB loan has no minimum cash requirement in the downpayment as long as the CPF OA is sufficient.


Conclusion

We hope this article helps you in making a decision to take up one of the loan before you start hunting for your HDB flat.



Date first posted on 18 June 2019; Last Edited on 18 June 2019

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