Most homeowners, when choosing a home loan, might wonder—which is better, an HDB loan or a bank loan?
During the COVID-19 pandemic, home loan interest rates were near zero, but the era of low mortgage rates has now ended. The US Federal Reserve has been steadily raising interest rates, and on November 2, 2022, it is expected to implement its fourth consecutive 0.75 percentage point hike, bringing the rate to a range of 3.75% to 4%. As local banks adjust their loan packages, mortgage rates have risen in tandem.
With the possibility of further rate hikes, should HDB flat owners still opt for a bank loan? Would an HDB loan be a better choice? In this article, we compare the differences between HDB loans and bank loans to help buyers make an informed decision.
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HDB Loan vs. Bank Loan: An Overview
The HDB Concessionary Loan, more commonly known as the HDB housing loan, and bank loans each have their pros and cons. Here is an overview of their main differences.
| Loan Type | HDB Loan | Bank Loan |
| What it is | A home loan provided by the Housing & Development Board (HDB) | A home loan provided by local Singaporean banks, e.g., DBS, UOB, etc. |
| Loan Eligibility | Detailed requirements, e.g., must meet income ceiling and citizenship requirements | Usually just requires a good credit score, with no income ceiling requirement |
| Applicable Properties | HDB flats only | Both HDB flats and private properties |
| Minimum Loan Size | None | Usually at least $100,000 |
| LTV (Loan-to-Value) Limit | Up to 80% of the property value | Up to 75% of the property value |
| Down Payment | 20% of the purchase price, can be paid in full using CPF Ordinary Account (OA) savings. Note: For resale flats, a deposit of up to $5,000 needs to be paid to the seller. |
25% of the purchase price, with at least 5% in cash and the remaining 20% using CPF |
| Interest Rate | Currently 2.6% per annum, which is 0.1% above the CPF OA interest rate | Currently floating rates are 3.71%~4.11%* and fixed rates are 4.25%~4.30%*, but this changes with market conditions |
| Types of Loan Packages | Only one type | Mostly floating rate packages, some fixed rate and hybrid packages |
| Maximum Loan Tenure | Up to 25 years | Up to 35 years |
| Early Repayment or Prepayment Penalty | None | Usually 1.5% to 1.75% |
| Late Payment Penalty | 7.5% per annum, but negotiable | Depends on the bank, but generally not as lenient as HDB |
*Based on the best rates available in the market as of December 26, 2022, which will be used as a reference in this article.
Everyone’s situation is different, so the available loan options will also vary. Before we proceed, it’s advisable to first determine which type of home loan you are eligible for based on your personal circumstances.
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HDB Loan vs. Bank Loan: Eligibility Criteria
The only option for private residential properties (such as condominiums or landed houses) is a bank loan. Only HDB flats, whether new or resale, may be eligible for an HDB loan.
HDB Loan Eligibility
| Citizenship | At least one buyer must be a Singapore Citizen |
| Past Home Loans and/or Ownership | • Have not previously taken two or more HDB loans
• Have only taken one HDB loan, and the last property owned was not a private residence (local or overseas), such as: HUDC, property acquired by gift, property inherited as a beneficiary, or property owned/acquired/disposed of through a nominee |
| Income Ceiling | Not exceeding $14,000 for families, $21,000 for extended families, and $7,000 for singles under the Single Singapore Citizen (SSC) Scheme |
| Property Ownership | • Do not own any other property locally or overseas, and have not disposed of any property in the 30 months before applying for the HDB Loan Eligibility (HLE) letter
• Do not own more than one market/hawker stall or commercial/industrial property. If you do own one, you must be operating the business there and have no other sources of income |
If you wish to apply for an HDB loan, you must obtain an HDB Home Loan Eligibility (HLE) letter. For more details on applying for an HLE, you can visit the HDB official website.
Bank Loan Eligibility
The eligibility criteria for bank loans are not as strict as those for HDB loans. Each bank has its own assessment methods, but generally, as long as you are in a good financial position with a high credit score, you should be fine.
If you are unsure about the bank loan criteria or which bank to approach, you can seek assistance from our site.
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Both HDB and Bank Loans are Subject to TDSR and MSR (for HDB Flats Only)
Whether it’s an HDB loan or a bank loan, the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) limits will apply. These limits are set by the government (not HDB or the banks) to ensure people do not borrow more than they can afford.
What is the Total Debt Servicing Ratio (TDSR)
All homebuyers will be subject to the TDSR, regardless of the loan type they choose. The property cooling measures in December 2021 revised the TDSR from 60% to 55%. Essentially, the amount you can borrow is limited by your monthly repayment, which cannot exceed 55% of your monthly income.
The TDSR is a limit on all liabilities (not just the mortgage), meaning that if you are already repaying multiple loans, you may not be able to get a home loan, or you may have to reduce the loan amount.
The property cooling measures of September 2022 announced that from September 30, 2022, the interest rate floor used to calculate TDSR and MSR would also be raised by 0.5%. For bank loans, the medium-term interest rate will be adjusted from 3.5% to 4%; for non-residential property loans and cash-out equity loans, it will be adjusted to 5%; and for HDB loans, it will be adjusted to 3%.
What is the Mortgage Servicing Ratio (MSR): Only for HDB Flats and ECs
HDB flats and Executive Condominiums (ECs) will also be subject to the MSR, which stipulates that the monthly mortgage repayment cannot exceed 30% of the borrower’s and/or joint borrowers’ monthly income. From September 30, 2022, the aforementioned increase in the interest rate floor will also apply.
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5 Key Considerations When Choosing Between an HDB Loan and a Bank Loan
Now that we’ve covered loan eligibility and government restrictions, let’s compare HDB loans and bank loans.
1. Bank Loans Have a Stricter LTV, But Borrowing Less Means More Savings in the Long Run
HDB Loan LTV: Up to 80%
Previously, an HDB loan could cover up to 90% of the purchase price for a new HDB flat, or the lower of the resale price and market value for a resale flat. However, the new September 2022 property cooling measures in Singapore adjusted the LTV limit for HDB loans to 80%, reducing the maximum amount future homebuyers can borrow from HDB.
Still, you can borrow more money with an HDB loan than with a bank loan. While borrowing more might seem like a good thing, taking on a larger loan could mean paying more in interest in the end.
Additionally, the 80% limit depends on your CPF balance. HDB requires you to empty your CPF Ordinary Account balance (with an option to retain up to $20,000), which means if you have a substantial CPF balance, you might not get the full 80% LTV. This is different for bank loans.
Bank Loan LTV: Up to 75%
In contrast, a bank loan can only cover up to 75% of the purchase price. The 5% difference compared to an HDB loan means you’ll need a larger down payment if you choose a bank loan, which can have a real impact on your finances, especially if you are tight on cash and/or CPF savings.
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2. Bank Loans Have Higher Down Payments, Making Cash Flow Tighter
As mentioned above, you can borrow more money from HDB than from a bank. However, looking at it from another perspective, a 20% down payment is more manageable than 25%.
Both HDB and bank loans allow you to use your CPF Ordinary Account savings, cash, or a combination of both for the down payment. But the applicable proportions differ in the long run, and therefore, the amount of cash you need to pay upfront also differs.
HDB Loan Down Payment: Minimum 20%, Can Be Paid in Full with CPF OA
Assuming a direct purchase, when you apply for an HDB loan, the minimum down payment is 20%. If you have enough savings in your CPF Ordinary Account, you can pay this in full with CPF, meaning it’s possible you won’t need to pay any cash for the down payment.
Bank Loan Down Payment: Minimum 25%, with 5% in Cash
A bank loan requires a much higher 25% down payment, of which at least 5% must be paid in cash, while the remaining 20% can come from housing grants or CPF.
If you find this calculation confusing, refer to the example below.
Assuming you are buying an HDB flat worth $600,000
| If you take an HDB Loan | If you take a Bank Loan | |
| How much down payment do you need? | $120,000 (20% of $600,000) | $150,000 (25% of $600,000) |
| How much CPF OA savings can be used for the down payment? | $120,000 (full down payment) | $120,000 (20%) |
| How much cash is needed upfront? | No cash needed if CPF OA savings are sufficient | At least $30,000 (5%). If CPF OA savings are not enough to cover the full 20%, you will also need to pay the difference in cash. |
Special case: If you are buying a resale HDB flat, you will need to pay a deposit of up to $5,000 to the seller, which increases your upfront cash cost.
Generally, an HDB loan requires a smaller cash down payment, which is preferable for those with limited cash savings and/or cash flow, such as many young couples buying their first Build-To-Order (BTO) flat.
While an HDB loan requires less upfront payment, the overall cost for the buyer is higher, especially if you want to borrow more to reduce the down payment. A bank loan requires a higher down payment, but if you can afford the upfront cost, you may save more in the long run.
3. HDB Loan Interest Rates Are More Stable
HDB Loan Interest Rate: 2.6%, Unchanged Since 1999
The HDB loan interest rate is pegged at 0.1% above the prevailing CPF Ordinary Account interest rate. The CPF OA interest rate is linked to the average deposit rates of major local banks over the past three months or a minimum of 2.5%, whichever is higher.
As of now, the HDB loan interest rate is 2.6% per annum and has not changed since July 1999, which may be more preferable for risk-averse individuals. Given that the monthly repayments are predictable, taking an HDB loan can help with better planning.
Bank Loan Interest Rates Are More Volatile
Conversely, bank loan interest rates fluctuate more with the market, making them more suitable for those with a greater risk appetite who wish to take advantage of interest rate fluctuations to get a competitive mortgage package, especially during a property market downturn.
Banks offer floating rate and fixed rate packages. Floating rate packages are pegged to a benchmark rate, with the spread fixed during the lock-in period. Floating rates are more volatile as they typically fluctuate with the benchmark rate based on market conditions.
Some banks, like DBS, also offer hybrid packages that allow borrowers to have up to half of their mortgage amount on a fixed rate package, with the remainder on a special floating rate package.
Although fixed rates are more stable, they usually come at a premium compared to floating rate packages. After the lock-in period, the interest rate will fluctuate depending on market changes, and it usually rises. Furthermore, banks can and sometimes do adjust their fixed rate package offerings.
As of December 26, 2022, the lowest floating rate was 3.71%, and the lowest fixed rate was 4.25%. While current bank mortgage rates are higher than HDB’s rate, bank loans are tied to the market, which means if rates plummet again, buyers could benefit from greater cost savings. The reverse is also true; if rates continue to rise, buyers will pay more.
4. You Can Switch from an HDB Loan to a Bank Loan, But Not Vice Versa
If a buyer decides to switch from an HDB loan to a bank loan after a few years, it is possible. However, the reverse is not. If you choose a bank loan, you automatically lose the eligibility to switch (or switch back) to an HDB loan.
For those who already have a bank loan, you can either reprice your existing home loan with the same bank or refinance with another bank to apply for a more competitive interest rate package.
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5. Penalties for Bank Loans Are Higher
A home loan is a long-term commitment that can last for decades. Therefore, it’s important to consider your future plans at every stage of your decision-making.
Generally, an HDB loan is more flexible, offering more leeway for changes in your financial situation. If you receive a windfall (e.g., winning the 4D lottery), you can pay off your loan early without any penalty. The same applies if you switch to a bank loan with a lower interest rate after a few years. If you face financial difficulties and struggle with repayments, you will incur a late payment fee of 7.5% per annum. This fee is calculated on the overdue amount, not the full loan, but you can negotiate with HDB, as they are generally more lenient than banks.
With a bank loan, if you decide to make an early repayment to reduce the loan size during the lock-in period, there is typically a penalty of 1.5% to 1.75%. Late payment fees vary by bank and are harder to waive or reduce compared to HDB. If you default on your mortgage, the bank may offer a Debt Consolidation Plan (DCP) or restructuring programs to help improve the situation. If that fails, the bank has the right to repossess the property and sell it in a mortgagee sale on the auction market as a last resort to recover the outstanding debt.
Choosing an HDB Loan or a Bank Loan
If you’ve read through the above and are still undecided, ask yourself one last question—do you want to save on costs, or do you not mind paying a bit more to avoid hassle? Then, make a choice based on your personal circumstances.
The stable 2.6% interest rate of an HDB loan makes long-term planning easier, and you can pay a smaller down payment. If your financial situation improves in a few years, you have the freedom to choose whether to switch to a bank loan.
Buyers usually opt for a bank loan if the interest rates are more competitive. As mentioned, to enjoy more competitive rates, you must first ensure you can afford the minimum 25% down payment. But in the long run, you also need to consider the impact of rising interest rates on your monthly loan repayments.
Ultimately, there is no right or wrong choice between the two loans. The best one is the one that best suits your financial situation.
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