1. Bank loans have a stricter LTV, but borrowing less also means more savings in the long run
HDB home loans have mortgage rates of up to 80%
In the new Singapore property cooling measures in September 2022, the mortgage rate for HDB-issued loans was adjusted to 80%, reducing the maximum amount that future homebuyers can borrow from HDB.
Nevertheless, setting the LTV at 80% means that you can borrow more than a bank loan. While it may seem like a good thing that you can borrow more money, getting a bigger loan may mean you end up paying more in total interest.
Also, note that the 80% limit is subject to the PF balance. If you have a large CPF balance, you may not be able to get an 80% loan. This is not the case with bank loans.
Bank loans LTV can be up to 75%.
By comparison, a bank loan can only cover up to 75% of the purchase price. This 5% difference means a larger down payment is required, which can have a real impact on your finances, especially if your cash and/or CPF savings are tight.
2. Bank loans require a higher down payment, which can cause difficulties in cash flow
HDB loans require a minimum 20% down payment, which can be fully covered by CPF OA
Assuming a direct purchase, when you take out a HDB loan with a minimum down payment of 20%, you can use your CPF OA to pay in full if you have enough savings in it. This means you may not need to come up with a single penny (at least for the down payment).
Bank loans require a minimum down payment of 25%, of which 5% must be in cash
Bank loans require a much higher down payment percentage of 25%. Of this, at least 5% needs to be paid in cash, while the remaining 20% can come from housing allowance or your CPF.
That said, while HDB home loans require less upfront payment, they can be more expensive overall, especially if you take out a larger loan to reduce your down payment. Bank loans require a higher down payment, but may offer more potential cost savings if you can afford the upfront fees.
3. HDB home loan interest rates are more stable
HDB loan interest rate of 2.6% has not changed since 1999
HDB's loan interest rate is pegged to the then CPF OA rate +0.1%. CPF interest rate is then based on the average rate offered by major local banks over a three-month period, or a minimum of 2.5%, whichever is higher.
Bank loan rates are more volatile
Conversely, bank home loan rates are more volatile as they change with the market. Bank loans are better suited for those with a greater appetite for risk who want to take advantage of interest rate fluctuations to get a competitive mortgage package, especially when the market is down.
Banks offer variable rate packages and fixed rate packages. Variable rate packages are tied to the prime rate and have a fixed spread over the lock-in period. Floating rates are more volatile as they fluctuate with the prime rate and are usually based on market conditions.
4. You can refinance from a HDB loan to a bank loan, but not the other way around
If, after a few years, you decide you want to switch from a HDB loan to a bank loan, you can do so. However, the reverse is not possible; if you choose to take a bank loan, you are automatically disqualified from switching (or switching back) to a HDB home loan.
For those who have taken a bank loan, you can reprice a new package from the same bank or refinance with another bank to get a more competitive rate.
5. Higher penalties on bank loans
A home loan is a long-term commitment with a term of several decades. Therefore, it is important to consider your future plans at every stage of the decision making process.
In general, HDB loans are more flexible and have more wiggle room to adapt to changes in your financial situation. If you happen to get a windfall, you can repay any amount you want without penalty. If, after a few years, you decide to switch to a bank loan to lower your interest rate, you can do that, too.
If you run into financial difficulties (Choy!), there is a 7.5% deferred repayment fee (on the amount deferred, not the entire loan), but you can appeal. HDB is known to be more lenient than banks.
For bank loans, there is usually a penalty of 1.5% to 1.75% if you decide to repay early to reduce the size of your loan within the lock-in period. Late repayment fees vary from bank to bank and are more difficult to get waived or reduced.
In the case of a delinquent mortgage, the bank may explore a debt consolidation plan/restructuring option with you to help improve your situation. If there is no way out, the bank has the right to repossess the property and sell the collateral as a last resort (auction) to recover everything you owe.
Choosing between HDB loans and bank loans
If you have come this far and are still on the fence, here is a final question to ask: Are you motivated by cost savings or are you the type of person who doesn't mind paying a little more to avoid trouble? This may have an impact on whether a HDB or bank loan is better for you.
HDB's stable 2.6% interest rate makes long-term planning easier. In addition, you can make a smaller down payment. If, after a few years, your financial situation improves and you want to switch to a bank loan, you are free to do so.
