Following up on the article comparing HDB loan with bank loan and explaining the reasons why a HDB loan is better, we visit the top reasons why some HDB owners take up a HDB bank loan and why it is better than HDB concessionary loan.
Eligibility for a HDB concessionary loan
Those who are not eligible have to apply for a bank loan for their HDB. In this situation, it’s clear-cut. The only comparison you should make is which bank loan is more suitable for you. One should be aware of the HDB MSR loan guidelines. You should compare HDB bank loans and calculate the interest payable and monthly installments of all HDB home loans provided by banks in Singapore. For those who are eligible for a HDB loan, please read on for points to consider why a HDB bank loan might be better.
Loan quantum
The rising prices of property in Singapore means HDB flats (BTO, DBSS or resale) are at record prices. With the cooling measures implemented by the Singapore government, the COV portion is decreasing and seemed to be stabilizing. However, this only mean lesser cash upfront as COV can only be paid by cash. The valuation of HDB flats are higher than before, which means a higher loan quantum is required if one takes up a 80% loan from the bank. A bigger loan quantum means the higher-end of the legal subsidy can be obtained, and more savings can be achieved as long as bank loan interest rates are lower than HDB interest rate of 2.6%.
Legal subsidy
Refinance applications may enjoy legal subsidy, about 0.4% or up to $2,500, whichever is lower. Typical lawyer fees is about $2,500. So a loan of $500,000 may attract a subsidy of $2,000 and the home buyer will pay the balance of $500. Unfortunately, mortgage for new purchase do not have this benefit.
Low interest rates
Interest rate in today’s environment is low and in fact, at all-time low. It is still low despite a slight increase recently. HDB loan interest rate is 2.6% while banks are offering 1% upwards. The various HDB bank loans are based on SIBOR, SOR or bank board rates on top of a spread. These HDB bank loan rates are around 1% for floating while fixed rates is higher at 1.4% to 2%. Is the direction only upwards or will remain low? Though your guess is good as mine, we can take cue from the past and what the world is doing. US Federal Reserve seemed to intend to keep interest rates low till 2014-2016. Can they afford to raise it significantly in a seemingly fragile economy?
Risk appetite
This is a question that many home buyers failed to ask themselves first. Yes they want low and constant interest rates. No they don’t want changes and volatility in interest rates. However, these two points seldom agree with each other. The perceived fixed rate of 2.6% for HDB concessionary loan is not exactly correct. It is not fixed. It is just that HDB has not revised and pegged it differently since day one. They review it every quarter, with the same frequency as 3M SIBOR. Or you may prefer FHR mortgage offered by DBS, where FHR is the average of 12-month and 24-month fixed deposit rates.
Time horizon
Buying a BTO, DBSS, SERS or resale HDB flat comes with a Minimum Occupation Period which is currently between 5 to 7 years. So regardless of your future upgrading plans, you must serviced the mortgage for 5 to 7 years at least, before you can sell and redeem fully the loan. This will be an important factor in reasoning why a bank loan might be better than a HDB loan.
TDSR Framework
MAS released the Total Debt Servicing Ratio (TDSR) framework that should be adhered by all banks. The things you should take note are the 60% threshold, haircut/ discounts on variable income among others.
Savings from a HDB bank loan over a HDB loan
Scenario 1
Mr Tan and family prefers fixed packages and they actually think the HDB loan of 2.6% will provide them a peace of mind. They will be purchasing a flat and intend to borrow $400,000. Mr Tan aspire to upgrade the HDB flat to a private apartment after 5 years. They wonder what the packages are available in the market. They use the Refinance Loan Calculator and noticed the 5 year fixed package with rates of 1.8% fixed for the first 5 years and SIBOR + 1.15% thereafter. Based on 35 years of loan tenure, the monthly savings are $167 and $10,000 over 5 years! This is a significant savings despite some outlay after the legal subsidy of a bank loan. He asked the banker to compute the numbers if the nett interest rate increases to 4% hypothetically from year 6 onwards. It would have taken him another 4 years till year 9, before the $10,000 savings disappears. So his considerations are:
- the fixed $10,000 savings over 5 years,
- a smaller outstanding loan amount after 5 years,
- the opportunity to refinance or reprice after 5 years without incurring legal clawback,
- his upgrading plans after the MOP expires,
- the likelihood of 4% interest rate from year 6 onwards,
- another 4 years till year 9 before the $10,000 savings are diminished.
He decided that this HDB bank loan is suitable for his family.
August 2012: Things just got sweeter. For new loans (not applicable to refinancing), 5 years fixed package is now at a all-time low of 1.5% only. Hurry, this promotion is ending soon on 20 August 2012. Read more on 5 years fixed loan for HDB and simply Contact Banker for a discussion.
June 2012: Note that 5 years fixed package is at 2.25% hence savings will be different.
2013: DBS/ POSB has launched a package to protect you from rising interest rates, and guarantee to be cheaper than HDB concessionary rate of 2.6%, for 8 years.
August 2013: Lowest fixed rates is 1.42% average over 3 years
September 2017: Fixed rates start from 1.48% and variable from 1.28%.
Scenario 2
Mr Lim and his family have been staying in his HDB flat 2 years ago. His outstanding loan amount with HDB is $300,000 and has 3 years of MOP left. He like to refinance to a bank loan for maximum savings and understands that interest rates are subjected to changes. His view is interest rates will remain low but move up slightly as the vunerable economy recovers. He, like many Singaporeans, also aim to upgrade to a landed property after the MOP expires and thinks that HDB prices should remain strong unless there is a worse crisis than the previous one. He uses the Refinance Loan Calculator to compare with a HDB rate of 2.6% and loan tenure of 30 years. The Calculator showed that the better packages can save him more than $200 a month or $7,200 over next 3 years. The interest rates are about nett 1.1%, comprising of a spread of 0.75% to 1% on top of SIBOR or SOR, depending on the banks.
We assisted him on obtaining an HDB loan approval in-principle. Banks approved the applications due to the good credit ratings and serviceability of Mr Lim and his wife. He decided that a HDB bank loan is appropriate over a HDB loan.
Scenario 3
Mr Bernard and his family bought the HDB flat 7 years ago. His outstanding loan amount with HDB is $150,000, 15 years left and MOP has expired. He wonder if he can take advantage of the current low interest rate environment and refinance his HDB loan to a HDB bank loan and at the same time, extend the loan tenure.
The Refinance HDB Loan Calculator computes the savings of about $100 a month or only $1,200 a year at best. His legal subsidy will be $600 and likely to pay almost $2,000 for conveyancing fees, even after negotiating with the banks. This one-time expense will require 2 years of savings from refinancing, assuming interest rates remain similar. If SIBOR or SOR increases, his savings will be lesser.
He contacted FindaHomeLoan.co and spoke to us. He learnt that loan quantums of about $300,000 make sense to refinance to a HDB bank loan. Although he can stretch his loan tenure to 25 years and reduce his monthly installments, his savings is not substantial and the risk/reward ratio is not to his advantage. He decided to stick with his HDB loan.
You might be interested in reasons to choose a HDB loan over a HDB bank loan.
