After you have decided on the property you want to buy, the next step is to decide how to finance it.

If you want to buy a HDB flat, you can choose between a HDB concessionary loan or a bank loan.

If you want to buy an executive condominium or a private home, you can only choose a bank loan.

1. HDB Loan

The Housing Authority offers home loans to eligible home buyers at a preferential interest rate, which is 0.1% higher than the CPF interest rate for the same period. Currently, the prime rate for HDB loans is maintained at 2.6% per year.

The HDB loan interest rate is higher than the variable rate offered by most banks. However, since the loan-to-valuation ratio for HDB loans can be up to 85%, compared to 75% for private bank loans, the down payment is more affordable.

HDB Preferential Loan Eligibility

To be eligible for HDB loans, at least one buyer must be a Singaporean citizen and your average monthly household income must not exceed $14,000. A full list of eligibility criteria can be found on HDB's website.

Before applying for a loan from HDB, you will need to obtain a loan eligibility certificate from HLE. The Loan Eligibility Notice serves as a financial planning tool and contains important information such as the maximum loan amount you can borrow, the maximum monthly repayment you can pay, and the maximum repayment period for your loan.

You can apply for a loan eligibility notice online at the HDB website. In order to enjoy a seamless application experience, it is best that you prepare electronic copies of your income documents in advance.

Specifically, you will need the last three months' salary statements, and the last 15 months' CPF contribution records.

Once your loan eligibility is approved, the loan eligibility notice is valid for six months from the date of issue, which is sufficient for you to complete the HDB loan.

2. Bank Loan

In addition, you may consider obtaining a home loan from a bank or financial institution.

The main benefit of a bank loan is that you may pay much less than a preferential HDB loan in a low interest rate environment.

To reiterate, to take advantage of such loans, you must be able to afford a 25% down payment, of which at least 5% must be in cash.

Suppose you want to buy a $1 million house, you need a total of $250,000 down, of which $50,000 must be paid in cash.

There are two types of bank loans, fixed-rate loans and variable-rate loans.

The agreed interest rate is usually locked in for 2 to 3 years, and the lock-in period expires before reverting to another rate determined by the bank.

Fixed Rate Bank Loans

As the name implies, a fixed rate home loan uses the same agreed interest rate for the entire term of the contract. For example, if you sign a 2-year fixed rate package at 2.5% per year, the interest rate will remain the same for two years after you sign.

Variable Rate Bank Loans

Variable rate home loans are slightly different. A variable rate is tied to an index and will move up and down with the index. Variable rates are often considered more volatile, while fixed rates are more stable.

The most popular type of variable rate loan is the SORA, which will replace the SIBOR.