HDB Loan vs Bank Loan

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Owning a house is a dream that every Singaporean hopes to one day achieve. It is a lifetime goal that is worth pursuing.

However, without the correct professional guidance, financing this dream can be tricky. The Singaporean home loan market offers you two main options for funding of:

  • HDB loans
  • Bank loans

Each of these loans has some merits and demerits, which can help to determine your final choice and help you pick the best option.

Our concise guide and comparisons will assist you in understanding the differences between the two and allow you to make a more informed decision.

Eligibility

Eligibility is the first aspect to consider when seeking a home loan. Both HDB loan and bank loans have specific sets of eligibility requirements.

For you to qualify for an HDB loan, you need to a Singaporean citizen or resident and earn an annual income of no less than S$36,000 per year. You must also own no private property both at home and abroad.

Furthermore, you must not have taken more than two HDB loans previously, and have not sold a private property in the last 30 months. 

For bank loans, you only need to meet one requirement, which is to have a good credit score. Bank loans can be an excellent option for people who cannot access HDB loans due to a large number of eligibility requirements.

Down Payment Requirements

You’ll need to make a down payment before accessing a mortgage. For HDB loans, you’ll need a 10% payment in cash or CPF (Central Provident Fund). You’ll get 90% of the LTV for your HDB concessionary home loan to finance your property and pay the remainder through CPF or cash.

On the other hand, banks offer you up to 75% financing. The remaining 25% deposit you can pay in cash and CPF.

Singaporean banks require you to pay a 5% down payment in cash. The rest of the 20% you can finance through CPF. 

Interest rates

Interest rates are one of the major contributing factors to the cost of your loan

HDB loans have a higher interest rate to bank loans, in the first year of repayment and beyond. These loans have an average fixed rate of 2.6%, which is 0.1% above the CPF rate. So, you’re confident of the amounts you’ll pay until the final payment.

On the contrary, bank loan interest rates are variable. The rates depend on the SIBOR and SOR rates, or bank fixed deposit interest rates. Typically, interest rates for bank loans range from1.5% and 2.05%.

However, some banks offer fixed-rate home loans, which offer a lock-in period of up to 5 years.

Nonetheless, with a bank loan, you’re not sure about the amount you’ll pay in the next few months as this will depend on the changes in the market. Plus, financial institutions have numerous home loan packages, which without professional guidance, can be confusing. 

Pre-payment and Late Payment Penalties

At times, you may be in a position to pay your home loan earlier than planned, or an unexpected issue can lead to late repayments. You’ll need to carefully consider the leniency terms and penalty clauses that come with your loan facility.

With HDB loans, there are no penalties for early repayments. This feature is excellent because it gives you the chance to pay off your loans whenever you have the cash. Any late monthly payments on your HDB loan attracts a penalty of 7.5% p.a. Plus, you have an opportunity to discuss the penalty with the lender or come to Mortgage Simple for further advice.

Banks, on their part, require you to pay penalty fees, typically 1-2% for early loan repayment, which is a significant downside compared to HDB loans.  They also charge S$50 for each month late repayment.

In a word, it is vital to consider these aspects before deciding to go the HDB loan or bank loan way.  

Income Limits

HDB loans have maximum income limits set by the Housing Development Board. If you earn above these thresholds, you may not be eligible for a credit. These limits break down as follows:

HDB Loan Gross Monthly Income – Household Limits

Family Demographic Income Limits
Singles S$7,000
Nuclear Family S$14,000
Extended Family S$21,000

With bank loans, however, what you earn is of no concern to the bank, perhaps only in determining how much they can give you. In this respect, bank loans are less stringent in their requirements compared to HDB loans.

Pros and Cons of HDB Loan vs Bank Loan

So to summarise, here are some notable pros and cons of both HDB loans and bank loans:

HDB Loans

Pros

  • The down payment for a home purchased with an HDB loan can comprise of Housing Grants, CPF, or cash
  • They allow buyers to put less money down due to the higher loan-to-value (LTV) – the limit is 95%
  • HDB loans allow for early repayment without any penalties

Cons

  • HDB loans cannot be purchase private residences or condos, only flats
  • The best-in-market home loan rates are currently lower than HDB’s loan rate

Bank Loans

Pros

  • Bank home loans are less expensive than HDB loans
  • Bank home loans tend to offer more flexibility compared to HDB home loans, with fewer eligibility requirements, limits on income, a lack of citizenship restrictions, and also a lack of restrictions on which type of housing to buy
  • MAS regulations limit loans to 75% of the home’s sale price; borrowers must make more significant down payments.

Cons

  • Bank loans charge penalties on early repayment
  • Late repayment fees are hefty

Bottom Line: HDB Home Loan vs Bank Loan

Potential buyers must decide which finance option best matches their needs.

Citizens or residents that meet the HDBs criteria and are unable to obtain a lower interest rate from a bank, HDB loans are the best option.

However, most other loan applicants like business people or foreign residents would be better off with a bank loan; they cost less (as long as you make repayments on time) and are cheaper than HDB loans.

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