Guide To Mortgage Loans: HDB Loan vs Bank Loan

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Getting a home is the foundation to starting families in Singapore, according to Singaporeans. Thus, if you are considering whether to get a HDB loan or a bank home loan in Singapore to finance your home in the near future, this is a must-read for you.

  1. Eligibility

HDB Home Loan: More Criteria To Meet

To be eligible for a HDB loan, you or your spouse need to be a Singapore citizen. Neither of you must have taken two or more housing loans previously. If you have taken one housing loan previously from HDB, then your previous property mustn’t be a private property, including HUDC flats.

For HDB loan, there is also an income ceiling that you have to adhere to. Couples combined gross income cannot exceed $12,000 per month, while the combined gross income of your extended family for 3-Gen flats cannot exceed $18,000 per month. For singles, the gross income cap is $6,000 per month.

Lease of the flat is also an eligibility criterion for HDB loans. For those of you who are considering HDBs that have less than 60 years of lease remaining, you will first need to ensure that the HDB lease allows you to stay till you are at least 80 years old.

Bank Home Loan: Much Less Stringent Criteria

Under the banks, housing loans are much simpler to apply for. Banks do implement a minimum income criterion, which is upwards of $2,500 per month, depending on the bank. On top of that, if you do not exceed the total debt servicing ratio (TDSR) of 60%, you will be able to get one.

Verdict: Bank Loan

  1. Loan Amount & Down Payment

HDB Loan: MSR

If you are planning to borrow from HDB, you will need to understand the mortgage servicing ratio (MSR). Introduced a few years back, Monetary Authority of Singapore (MAS) set a 30% limit on the MSR. This means your monthly mortgage payment cannot be more than 30% of your combined income. For example, if your combined gross income is $6,000, your estimated maximum loan amount is $396,000.  We have a useful home loan calculator which you can play around with.

Apart from the MSR, HDB loan allows you to loan up to 90% of the property valuation. This translates to a 10% down payment that you have to pay, be it in your CPF OA or cash.

For HDB loan, it would be required to use up all your CPF before they can grant you a loan. Hence the loan amount will be up to 90% or whichever is lower after utilizing your CPF.

Bank Loan: MSR And TDSR

Bank loans, on the other hand, are restricted by the TDSR. The current TDSR framework limits your maximum loan amount to ensure that your monthly loan commitments do not exceed 60% of your combined gross monthly income. Using the same example, if your combined gross income is $6,000, you will only be able to loan $600,000-$800,000 from the bank. However, this only applies if you are buying a private property. If you are considering a HDB, you will still be subjected to the MSR.

Apart from the TDSR and MSR, bank loan allows you to loan up to 80% of the property valuation. This translates to a 20% down payment of the housing value. Unlike the HDB loan, the first 5% has to be settled in cash. The rest of the 15% can then either be paid by cash or CPF.

  1. Loan Tenure

HDB Loan: 25 Years Or Less

The maximum loan tenure for any HDB loan is 25 years.

However, there are other situations where your maximum loan tenure could be less than 25. The loan tenure will be the shortest of:

  • 25 years;
  • 65 – average age of buyers;
  • Balance lease – 20 years.

Bank Loan: 25-30 Years Or Less

The maximum loan tenure for bank housing loans is 20% longer than HDB loan, i.e. 30 years. That being said, a 30-year loan tenure will allow you to loan up to only 60% of your desired home’s value. If you want to loan up to 80% of your home value, the maximum loan tenure will be 25 years or 65 minus average age of buyers, whichever is shorter.

Verdict: Draw

  1. Home Loan Interest Rate

home loan interest rate

HDB Loan: Flat Rate (CPF OA Rate + 0.1%)

HDB offers all its loans at a flat interest rate throughout the whole loan tenure. The interest rate is calculated at CPF’s Ordinary Account (OA) interest rate plus 0.1%. In rare circumstances that CPF OA interest rate is adjusted, HDB loan interest rates will also be adjusted. The current HDB loan rate is 2.5% (CPF OA interest rate) + 0.1%.

Bank Loan: Floating Rate

In the first few years of banks’ home loans, you have the flexibility of choosing a fixed rate or floating rate. However, at the moment you refinance your home loan, you will face the likely scenario of having to settle for floating rates. This usually takes place in the second or third year past your lock-in period.

For example, DBS offers a floating rate known as Fixed Deposit Home Rate (FHR8), which refers to the prevailing 8 months Singapore dollar fixed deposit interest rate of DBS Bank for amounts within $1,000 to $9,999. Another floating rate that banks offer is the Singapore Interbank Offer Rate (SIBOR).

Verdict: Depends On Current Economic Climate

  1. Early Repayment

HDB Loan: No Penalties

One of the key edge HDB loan holds over bank loans is the flexibility to choose any early repayment option.

Firstly, you can choose to adjust your repayment period depending on your financial situation. You can choose to increase your monthly loan repayment amount to reduce future interest charges. Secondly, you can choose to make partial or full repayment without any consequence. If you are able to clear your loan early, HDB will be more than happy for you.

Bank Loan: Early Repayment Penalty May Apply

DBS Home Loan

Source: DBS

Unlike HDB, the bank needs to make money from every loan issued to every person. In the event that you take up a loan and decide to make early repayment, the bank loses out on the opportunity to make interest from your home loan. As such, some (if not all) banks will charge an early repayment fee if partial repayment is made.

Moreover, you are unable to adjust your loan repayment period. However, some banks like DBS have recently removed the early repayment charge to make banks’ home loans more attractive.

Verdict: HDB Loan

  1. CPF Or Cash?

HDB Loan: CPF Only

One of the things that people dislike about HDB loan is the enforced requirement to settle monthly repayments via CPF.

Did you know that if you are using your CPF for home loan, you will have to pay accrued interest back into your CPF OA? If you “borrowed” the money for your home loan with 25 years tenure, you will need to pay back 25 years of accumulated interest back to CPF at the prevailing CPF OA interest rate. However, the money is credited into your OWN CPF OA, not the CPF’s pocket.

Bank Loan: Choice Between Cash Or CPF

However, bank loans are not all that bad. One consideration for banks’ home loan is the choice to choose between cash or CPF for the monthly repayment. This is unlike HDB loan where you are forced to pay off your loan via your CPF savings.

Verdict: Bank Loan

So, What Should You Choose?

To the disappointment of many, there isn’t a one-size-fit-all choice. Your choice between HDB and bank loan will be determined by your needs and the economic condition at the point in time. This guide will serve as a good reference point to start any loan comparison.

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