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Deciding between HDB loans and bank loans? Here’s a quick reference.

November 16, 2017

HDB Loans vs Bank Loans



**Key points

  • HDB loans require a smaller cash outlay
  • Bank loans have been cheaper than HDB loans for about a decade, but this is due to the last Global Financial Crisis
  • You can switch from an HDB loan to a bank loan, but not the other way around
  • Bank interest rates are highly variable, whereas HDB loan rates seldom change
  • HDB is more lenient

**Public vs. private

HDB Concessionary Loans can only be used for HDB properties. Bank loans can be used for any kind of property.

However, there are no HDB loans for Executive Condominiums (ECs). You must use bank loans for ECs.

**Downpayment for HDB loans versus Bank Loans

The maximum Loan-to-Value (LTV) ratio for HDB Concessionary Loans is 90 per cent (i.e. you can borrow up to 90 per cent of your flat’s value or price, whichever is lower).

For the remaining down payment of 10 per cent, you can use a combination of cash or your CPF OA.

The maximum LTV ratio for bank loans is 80 per cent. Another 15 per cent can be paid with a combination of cash of CPF OA monies. The remaining five per cent must be paid in cash.

Regular loan repayment for HDB loans versus Bank Loans

The interest rate on HDB Concessionary Loans is always 0.1 per cent above the prevailing CPF rate. At present, this is 2.6 per cent per annum.

Bank loan rates are more variable. There is no perpetual fixed rate home loan in Singapore. Bank interest rates are mainly determined in three ways:

Singapore Interbank Offered Rate (SIBOR) loan packages

Swap Offer Rate (SOR) loan packages (rare today)

Internal Board Rate (IBR or BR) loan packages

For SIBOR packages, the interest rate is the prevailing SIBOR rate plus the bank’s spread. For example:

“3M SIBOR + 0.75” means the interest rate is the prevailing three month SIBOR rate, plus 0.75 per cent charged by the bank (the spread). Every three months, when the SIBOR rate changes, the interest rate will be changed to match the new rate.

This means that if you have a 1M SIBOR rate, the loan repayment amount will change every month. If you have a 3M SIBOR rate, the loan repayment amount will change every three months, and so forth.

SOR based loan packages are similar, but are based on the exchange rate between the US dollar and Singapore dollar, instead of SIBOR. SOR packages are rare, and interest rates are much more volatile than SIBOR.

IBR or BR loan packages have an interest rate set entirely by the bank. For example, a Fixed Deposit Home Rate (FHR) loan has an interest rate pegged to the bank’s fixed deposit rates.

These bank loans all differ from HDB Concessionary Loan rates, which almost never change.

**Why are bank loans cheaper?

The historical interest rate for bank home loans is between three to four per cent per annum. This is more expensive than HDB loans.

However, due to the Global Financial Crisis in 2008, bank interest rates have been at record lows for almost 10 years. Currently, bank loans are around 1.8 per cent per annum, as opposed to HDB’s 2.6 per cent.

But it may not last, as interest rates are normalising after the crisis.

**Dollar comparisons for a $350,000 flat

HDB loan:

Maximum loan quantum of $315,000

Down payment of $35,000 (combination of cash of CPF OA)

On a 25 year loan tenure, at 2.6 per cent per annum, monthly repayments = $1,429 per month

Bank loan:

Maximum loan quantum of $280,000

Down payment of $70,000. Of this amount, up to $52,500 can come from CPF OA. A minimum cash payment of $17,500 is required.

On a 25 year loan tenure, assuming an interest rate of 1.8 per cent per annum*, monthly repayments = $1,159.72 per month

*This is based on current, typical loan rates. We cannot assume that the bank interest rates will remain at this level over 25 years.

Switching from HDB loans to bank loans

You can refinance your HDB loan into a bank loan (subject to the bank’s approval), even after getting the initial 90 per cent LTV.

Bank loans, however, cannot be refinanced into HDB loans.

Leniency and late payments

The main intention of HDB is to provide the public with housing. The main aim of a bank is to find profits for its stakeholders / shareholders.

If you are unable to pay your home loan, HDB is more lenient in negotiations (but this doesn’t mean you can get away without paying your home loan – you can still be asked to sell the flat and downgrade).

Banks are quicker to foreclose, to minimise their losses.

Which is better?

If you’re on a tight budget, HDB loans should be considered first, as there is a smaller cash outlay. If you find the interest is too high, you can always refinance from an HDB loan to a bank loan later, but not the other way around.

If you intend to upgrade fast (e.g. sell the flat and buy private as soon as you can), you may want to consider a bank loan, or quickly refinancing into a bank loan from an HDB loan. This could reduce monthly repayments, and minimise the interest eating into your resale gains.

Speak to a qualified, independent mortgage broker for personalised help. These services are usually free, and everyone’s situation is different.


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