HDB Loan or Bank Loan: Which is Better?
For new Housing and Development Board (HDB) homeowners, choosing how to finance your home can be a daunting task. Besides the multitude of bank loan packages that are available to you, you can also choose to finance your home with an HDB loan.
To save you the trouble of digging through the dirt, I have decided to summarise some of the key advantages of both these options. These will be split over two articles.
In this first article, I will look at the advantages of an HDB loan before diving into the considerations of a bank loan in the second article.
HDB loans are accessible to Singaporeans who are looking to buy an HDB apartment. The current interest rate on the home loan is 2.6%. Before considering your options, you should first check to see if you are eligible for an HDB loan.
Below are some of the restrictions that apply to HDB loans:
1) At least one buyer must be a Singapore citizen;
2) Buyer must not own a private residence;
3) Buyer is limited to a maximum of two HDB loans;
4) Buyer must not have disposed of a private residential property within 30 months before application of the loan; and
5) There is a cap on buyer’s monthly income depending on room size and whether extended family will be staying in the property.
Now that we know the eligibility requirements, we can jump into the key advantages HDB loans have over bank loans.
Why Choose HDB loans?
a) Stable interest rates
Bank loans have a 3-year to 5-year fixed interest rate structure. Beyond that, the interest rate may fluctuate depending on the current interest rate prices. HDB loans, on the other hand, are more stable and are currently priced at 2.6% and do not tend to fluctuate.
b) Smaller downpayment
The maximum loan amount for bank loan is 80% of the value of the property. HDB loans, however, offer 90% maximum loan to value, lowering the down payment requirement for homebuyers.
c) No penalties for early repayment
Some banks charge a penalty for early repayment within the commitment period. HDB loans, however, do not have an early repayment fee and if your finances allow, you can consider repaying early without worrying about additional costs.
d) Less strict on late payments
Banks are extremely picky about mortgages being paid promptly every month. And why wouldn’t they be? Afterall, they are running a business that depends on timely repayments of loans. Fortunately, HDB loans are more forgiving in this respect. However, do take note, that there are still additional fees if you overstep the limits.
e) Use CPF to pay down payment
The Central Provident Fund (CPF) can be a useful venue to find the capital to pay off the down payment. With home prices skyrocketing, even a 10% down payment can add up to a substantial amount. Having the option to use CPF can help to improve your cash flow or allow leeway to fund a larger apartment.
The Foolish bottom line
HDB loans may cost more in terms of interest rates but they still hold many advantages for the new homeowner. The next article, I will dig into some reasons why you may wish to consider bank loans.