HDB Loan versus Bank Loan: A Guide to Financing your HDB Flat in Singapore

Purchasing your HDB flat seems an unnerving task for most of us. The journey starts when you take up the challenge and start playing possibilities in your head.

You are suddenly faced with a long laundry list of things to consider with priorities that are time-bound and imminent. The location, build, and size are the factors you can finalize quickly depending on your requirements.

However, your project budget, which plays a significant role in the whole process, is not easy to finalize. Deciding between an HDB or Bank loan is never a straightforward choice as your economic situation, and personal preferences play an immense part in strategizing your purchase budget.

To determine if the loan option you pick suits your requirements, the following charts show the benefits and disadvantages to look out for when selecting the best loan for you.

All You Need to Know About an HDB Loan

HDB Loans are usually the first kind of housing loans most Singaporeans come across. It is considered to be a more straightforward loan option compared to those offered by banks.

It is only applicable for use to buy an HDB flat and not to purchase a private residence. And while obtaining an HDB Loan seems such an overwhelming experience, it could be the most economical funding solution for your home purchase.

Here’s how the HDB loan works.

HDB Loan Features:

• Interest rate: 2.6% per annum (comparatively 0.1% above the prevailing CPF OA interest rate at 2.5%).
• Loan to value limit: You can get a loan to cover up to 90% for a new flat purchase. If you consider buying resale flats, the loan can be applied to 90% of the resale price or value, whichever is lower.
• Downpayment: Up to 10% (The full amount can be paid via CPF)
• Penalties are waived should you opt for early repayment of the loan.
• Couples applying for an HDB loan should have a combined monthly income of less than $14,000

Please note that the housing loan amount to be offered will depend on the buyer’s age, monthly income, and financial situation. When buying an uncompleted flat, HDB will review your financial standing for loan disbursement as the property’s completion draws near.

HDB Loan Eligibility and Requirements

Understanding if you are eligible for an HDB loan is important. Below are the usual requirements for application:

Citizenship and Age	At least one of the buyers must be a Singapore Citizen. Must be 21 years or older
Monthly Income	For families – $14,000 For extended families – $21,000 For singles – $7,000 (resale 5-room or smaller flat; or a new 2-room flexi flat in a non-mature estate)
Household Status	Buyers can only take 2 housing loans from HDB. You may not apply for a third HDB loan. Buyers who currently own private residential property or have owned and sold off a private residential property within the past 30 days cannot apply for an HDB loan

Benefits of an HDB Loan

Smaller downpayment required 

With an HDB loan, your downpayment only amounts to up to 10% of the purchase price and can be paid using your CPF Ordinary Account (OA).

In case you have a substantial amount saved in your CPF Ordinary Account, you most probably will not incur any out-of-pocket cost for your downpayment, as your savings will cover the amount.

This gives you more financial flexibility in terms of addressing other forthcoming costs such as furniture, appliances, home insurance, and refurbishments, among others.

In case you do not have enough savings in your CPF Ordinary Account, you will need to supplement the rest of the required downpayment in cash.

Competitive interest rate 

The HDB housing loan interest rate is fixed at only 0.1% above the prevailing CPF OA interest rate, which is 2.5%. This can change from time to time, in line with the revision of CPF interest rates.

Can be switched to bank loan 

HDB loans do not have a lock-in period and can be switched to a bank loan if you prefer. Choosing to take up an HDB loan initially and then eventually refinancing with a bank a few years later for a loan with lower interest rates is possible. Kindly also note that a buyer’s bank loan cannot be transferred into an HDB Loan.

No penalty for early repayment

The early pay-off of your HDB loan will not incur any penalties. In case you become financially stable and have the resources to pay your loan in advance, you can do so to reduce the total interest you will need to pay over the years.

Having this option to repay early is better to gain peace of mind knowing that you are not burdened by a loan, which you will need to deal with for an extended period.

Disadvantage of an HDB Loan

Higher interest rate

The HDB prevailing housing loan interest rate is 2.6% per annum, which is usually higher than those charged by banks for loans.

On the other hand, banks generally base their interest rates on SIBOR (Singapore Interbank Offered Rate) or fixed deposit home rate. And although there are inevitable fluctuations, the bank loan interest rate tends to be lower than HDB’s 2.6% per annum.

All You Need to Know About a Bank Loan

Another funding option is by taking out a bank loan, which you can obtain from any recognized financial institution regulated by the Monetary Authority of Singapore. Here is a rundown of everything you need to know about obtaining a bank loan.

Bank Loan Features:

• Interest rate: Varies per loan package and typically ranges between 1.2% to 3% per annum
• Loan to value limit: You can get a loan to cover up to 75% of your flat purchase.
• Downpayment: Up to 25% (at least 5% must be paid in cash)
• Early repayment will incur penalties.
• There is also a minimum loan amount required defined by the bank.

You have different types of bank loans to choose from, such as fixed-rate package, floating rate package, or a combination of both. Lastly, bank loan interest rates are aligned with the SIBOR (Singapore Interbank Offered Rate), SOR (Singapore Swap Offer Rate), or based on the Fixed Deposit Home Rate (FHR).

Bank Loan Eligibility and Requirements

As there are multiple banking institutions in Singapore, the eligibility and requirements will vary from bank to bank; hence you should check with the specific banking institution you prefer for their complete and comprehensive list of requirements and eligibility criteria.

Benefits of a Bank Loan

Lower interest rate

Bank loans are usually lower than the 2.6% per annum charged for an HDB loan. The downside is that bank rates are more prone to fluctuation, especially if you pick a variable or floating rate-type package. Banks also occasionally offer additional loan perks such as 24-hour emergency home assistance.

Eligibility criteria are easier to meet 

Bank loans usually have lesser restrictions compared to the HDB loan eligibility criteria. One of the major differences is that there are no income ceilings set for bank loans.

For example, couples that do not meet the HDB loan eligibility criteria, such as those that earn more than the income ceiling set by HDB, can apply for a bank loan without question.

On the downside, banks dictate a minimum loan amount required to be taken out depending on the individual’s capacity for payment.

Disadvantage of a Bank Loan

Early repayment penalty 

Since bank loans have a defined locked-in period (unless you opt for a flexible loan package), choosing to repay your loan earlier will cause you to incur a penalty that is usually 1.5% of the loan amount.

The interest rate is not guaranteed and will fluctuate from time to time

Compared to HDB loans, bank loans’ interest rate will occasionally fluctuate as it is greatly affected by the market movements.

Regardless of whether your loan package is a fixed rate, this interest rate is fixed only for the first few years and usually not for the entire loan tenure.

This means that the interest rate you see today will not be the same as the amount you pay a few years down the road.

Higher downpayment required 

The downpayment required for taking up a bank loan varies from 5% to 25% of the flat price.

From this 25%, you will need to pay at least 5% in cash, with the remaining 20% being paid using your CPF OA or cash in case you do not have enough in savings.

If you do not have enough in your CPF OA, you will have to top up the rest of the downpayment first, which could be quite a hefty amount to shell out, especially for those that don’t have disposable income.

Bank loans are not transferrable into an HDB loan 

Your Bank loan cannot be switched into an HDB loan, unlike the opposite, so you definitely need to be certain that you can repay the loan within the bank’s terms to avoid refinancing or taking another loan with the bank.

6 Key Differences Between an HDB Loan and a Bank Loan

To compare the two loan options side by side, we have prepared the below table for easier reference:

	HDB Loan	Bank Loan
Interest Rate	Fixed at 2.6% per annum	Ranges from 1.2% to 3% per annum
Repayment Period	Consistent due to stable interest rates	Varies as fixed rates are only valid for 2 to 3 years at best
Loan to Value Ratio	90% loan coverage of flat purchase amount	75% loan coverage of flat purchase amount
Downpayment	10% can be fully paid using CPF	Up to 25% with least 5% to be paid in cash
Early Repayment Penalty	No early repayment incurred	Yes, a penalty will apply for early repayment (1.5% of the loan amount)
Late Repayment Penalty	7.5% late payment fee per year	$50 late payment fee per repayment

To summarize the key points:

• Note that HDB Loans have a higher interest rate, but it is a fixed amount, so you can project a better payment scheme for your loan repayment for years to come.
• Comparatively, Bank Loans have much lower interest rates. However, they are usually only valid for the initial 2 or 3 years at best. They will usually fluctuate dependent on SIBOR (Singapore Interbank Offered Rate), SOR (Singapore Swap Offer Rate), or based on the Fixed Deposit Home Rate (FHR).
• You will get more mileage for your loan in terms of home purchase amount coverage from HDB at 90%, while bank loans only usually cover only 75% of the total home purchase amount.
• HDB loans allow you to pay your downpayment fully using your accrued CPF savings if you have enough, while for bank loans, you need to pay a 25% downpayment with at least 5% in cash
• No penalties are incurred for early repayment of HDB loans, while a penalty amounting to 1.5% of the total home purchase amount will be incurred for bank loans.

Closing

Now that we have covered the basics of obtaining an HDB Loan versus a Bank Loan, you now have a better understanding and clearer picture of which loan types are best for you.

The information that has been provided will somehow give you a high-level insight into which one is more beneficial in terms of your financial capabilities.

Knowing that taking a home loan is never easy, as, with all personal finance matters, the best home loan ultimately depends on your lifestyle.

365 Credit Solutions offers flexible and hassle-free loan terms for new individuals looking to purchase a home of their own. We make it so much easier for our borrowers by offering personal loans without putting in any assets or collateral.