Many first-time HDB owners use a HDB concessionary loan as the default loan because it is. After all, you don’t need to go through all the hassle of understanding home loan jargon, figuring out all the terms and conditions and finding which one suits you best. After finally finding your dream property, you probably don’t want to go through another round of tedious research to find a home loan.
But do you know the price of convenience? With the HDB concessionary loan rates at 2.6%, you are likely to be paying an extra few hundred dollars a year, losing out on potential savings of thousands of dollars in the long term. But of course, choosing a home loan is more than just about the interest rates. Let’s take a look at the main differences between a HDB concessionary loan and a bank loan to help you figure out which to choose.
|HDB Concessionary Loan||HDB Bank Loan|
|Interest rate||CPFOA + 0.1%
|1.6 to 2.25% (depends on banks and interest rate fluctuations)|
|Rate type||Variable only||Variable or fixed|
|Downpayment||CPF payment or cash. Minimum 10% downpayment.||At least 5% cash. Minimum 20% downpayment.|
|Repayment Period||25 years, or number of years up to 65 years of age, whichever is shorter||25 years, or number of years up to 65 years of age, whichever is shorter. Refinancing may allow up to 30 years tenure.|
|Late Payment charges||7.5% per annum||Depends on banks, but usually higher than HDB rates.|
|Early Repayment||No penalty||Depends on bank loan packages. Penalty if any, is set at 1.5% of prepaid amount.|
|CPF Usage||CPF-OA to be used fully||Flexibility to allocate the amount of CPF to be used towards the purchase of HDB flat|
When deciding between the two types of loans, what factors should you focus on?
The most important here is perhaps whether you will even be eligible for a HDB loan. Some of the conditions you need to meet include:
- At least 1 buyer is a Singapore citizen
- Must not own or have disposed of any private residential property in the 30 months before the date of application for an HDB Loan Eligibility(HLE) letter.
- Have not previously taken 2 or more housing loans from HDB
- Average gross monthly household income does not exceed $12,000 for families
Upfront cash payment
Buying a property is a huge monetary commitment and the upfront downpayment can be a concern for homebuyers who may not have much cash on hand. If you find that the minimum 5% cash upfront payment is not what you can manage, then a HDB concessionary loan could be the choice for you to manage your cash flow. However, if you can comfortably afford the 5% downpayment in cash, you should consider taking up a HDB housing loan from bank instead due to the lower interest rates offered.
What some HDB homeowners can do is to take up the HDB concessionary loan first, before refinancing it to a bank later. This allows them to manage the upfront cash downpayment.
The main benefit of getting a HDB bank loan is the potential savings you can have. Let us illustrate this with an example.
- New purchase of HDB BTO of $300K
- Age 30 for both couple, and monthly average salary of $3,000
- Repayment period of 25 years
For HDB Loan,
90% loan-to-value = $270,000
Interest rate = 2.6%
Using the , monthly repayments will be around $1,225. This works out to be $367,500 in total.
For HDB Bank Loan,
80% loan-to-value = $240,000
Using an indicative interest rate of 1.8%, our calculator worked out a monthly repayment amount of $994. This works out to be $298,200 in total.
Savings from taking a bank loan = $69,300
Although we must emphasise that it is highly unlikely that bank rates remain constant, the probability of achieving a lower interest rate than CPF rates is quite high if the borrower refinances when possible. The amount of savings will still be pretty substantial over the period of loan repayment.
The main purpose of our CPF money is to save up for our retirement. But because the price of property is so expensive in Singapore, many of us take for granted our CPF money and often use as much of it as we can for property financing.
When you take up a HDB loan, it is mandatory to empty your CPF-OA to pay as much of the downpayment as possible, even if you can borrow up to 90% of the purchase price. While you may think that it is a good idea to take up less loan, the truth is we need to return the CPF money + accrued interest when we sell our flats later. Because the interest rate is higher than those offered by banks, you end up paying more interest in total. With a bank loan, you have the flexibility to allocate a smaller amount of CPF to be used upfront instead.
Choosing the right HDB loan can be an art, and having the help of an experienced mortgage broker can mitigate your blind spots. Contact us today to find out more about ongoing home loan promotions and get your home loan queries answered.
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