If there’s one thing Singaporeans don’t complain enough about paying more money for, it’s the interest for their CPF-pegged HDB mortgage. Most first-time homeowners, especially BTO applicants, choose to take the HDB Concessionary Loan over bank loans, despite the fact that the HDB home loan rate has now been higher than the average bank home loan for over a decade. And given that the US Federal Reserve just slashed interest rates to effectively zero due to Covid-19, bank home loans are set to stay super cheap—like “1-ish percent” cheap—over the next year or two.
Looking at the low interest rates private homeowners enjoy from banks, should we be feeling seriously shortchanged by HDB’s (ahem) Concessionary Loan rate?
First, let’s look at how interest rates are charged for HDB loans, versus the bank
Ever since March 1986, the HDB Concessionary Loan has been pegged at an interest rate of 0.1% above the prevailing CPF Ordinary Account (CPF-OA) interest rate. Since 1999, the CPF-OA base interest rate has been constant at 2.5%, which means the HDB home loan rate has been at 2.6% for over two decades.
So, it’s commonly mistaken fact that HDB home loan rates are always at a “fixed” 2.6%—it’s just been that way for longer than most can remember. If the CPF-OA interest rate were to rise or fall, the HDB loan interest rate would change with it; and the CPF rate is revised every quarter. It is just that CPF-OA base interest rates haven’t changed since 1999.
Banks, on the other hand, determine the interest rate for thier home loans in a multitude of ways:
- The loan may be pegged to the Singapore Interbank Offered Rate (SIBOR)
- There is an older Swap Offer Rate (SOR) based on the exchange rate of the Singapore dollar and US dollar, but this ended for residential properties in 2013, and is being transitioned to the Singapore Overnight Rate Average (SORA).
- An Internal Board Rate (also referred to as BR or IBR), which just means the bank decides whatever the rate is, independent of any particular index
- A variation of Board Rates, in which the bank pegs the loan to their timed or fixed deposit interest rates
The majority of Singaporean condo homeowners who take bank loans opt for SIBOR or fixed-deposit pegged rates. A handful of HDB dwellers also use bank loans (you always have the option to do this by refinancing your existing HDB loan to a bank loan, but the caveat is you’ll not be able to switch back).
[Recommended article: 9 Crucial Things Singaporeans Keep Forgetting About HDB Loans]
How did HDB loans end up being more expensive than bank loans for so long?
Looking back to the old days, HDB loans used to be much cheaper than bank home loans. In the late ’90s, for instance, it was quite common for bank home loans to be at around 4% per annum, sometimes even higher.
Things changed when the 2008 Global Financial Crisis (GFC) came along.
To stimulate the economy in the aftermath of the GFC, the US Federal Reserve (the central bank of the US) drastically reduced interest rates to 0-0.25% in October 2018. The was part of an overall package to stimulate the economy, along with Quantitative Easing (QE). If that sounds familiar, it’s because the same thing just happened as part of the Covid-19 response.
As our banks are part of the global financial ecosystem, the SIBOR rate began to fall as well. In January 2007, the three-month SIBOR rate was around 3.44%. By January 2009, the three-month SIBOR rate had fallen below 0.7 %. Bank home loan rates all around Singapore plummeted to record lows, and stayed low. The typical home loan interest rate, even today, is around 1.6 to 2% – still lower than HDB’s 2.6%. (With the recent Fed rate cut, there are home loans as low as 1.4% at the time of writing)
This means HDB loans have consistently been more expensive than bank loans for over a decade. And with rates cut again due to Covid-19, it could go on for even longer. That would seem really harsh on those who borrowed from HDB from 2009 onwards could end up paying a higher interest rate for close to half their loan tenure (HDB stipulates a maximum loan tenure of 25 years).
[Recommended article: 7 Things To Note Before Taking A Bank Loan]
So, is it the best idea to tie HDB home loan rates to CPF rates?
It’s true that, eventually, bank home loan rates must rise again. When the US economy recovers, the US Federal Reserve has to normalise the rate to avoid runaway inflation. In any case, banks are all too eager to adjust their rates upwards once a home loan is out of its ‘lock-in’ period, and much time and effort is spent by homeowners on refinancing or repricing to keep their interest rates low.
Despite the ‘stability ‘of HDB home loan interest rates, one might argue that 10+ years is far too long for HDB loans to be at a higher interest rate than many bank loans. After all, HDB’s mission is to ensure affordable housing, whereas the bank’s mission is to generate profits; as such, HDB loans should be able to provide a lower rate.
As private housing only uses bank home loans, we can also see how this could result in a “rich people getting richer” scenario. They can already afford a condo, but they still pay less interest than an HDB dweller?
Another thing to consider is that our CPF monies usage will impact our retirement when the time comes. Admittedly, the CPF Ordinary Account (CPF-OA), which we use for housing, is separate from the retirement-oriented CPF Special Account (CPF-SA), but Singaporeans should still be encouraged not to use too much of their CPF-OA.
A lower HDB interest rate could also mean that Singaporeans are able to transfer more of their OA to their SA to boost retirement funds; or even to service their home loans in cash while accumulating more CPF savings.
Furthermore, it’s quite a downer to think that if CPF one day to decide to pay us higher interest, our HDB loan rates will just rise along whatever that increase is.
BUT it’s also worth pointing out that HDB shoulders a higher risk than banks as a loan issuer. Not only does it finance a maximum of 90% of a flat’s value (compared to a bank’s 75%), it is also known to be more forgiving than banks when it comes to late monthly repayments. HDB is known to grant deferment of home loan repayments on a case-by-case basis for homeowners in hardship. Banks, on the other hand, are more likely to foreclose (i.e. force-sell your home) when you default.
In fact, as part of the Covid-19 Resilience Package, the Singapore government just announced that it would suspend late payment charges on HDB mortgage arrears for three months for those who are struggling with their mortgage, further highlighting the benefits of taking a HDB Concessionary Loan.
But should HDB home loans be pegged to SIBOR, like bank loans?
That isn’t the best solution either, as it will just result in problems when SIBOR rises again, and bank loan rates normalise. However, we should also avoid situations where HDB loans are more expensive than bank loans for prolonged periods. We could, perhaps, place a restriction on HDB loan rates, which prevent them from being higher than the median bank loan rate by a certain percentage.
Or, if we want to focus more on preserving our CPF savings rather than delepleting it on home loan repayment, another possible consideration is to peg HDB home loan rates to income levels instead of the prevailing CPF rate. This will ensure that a Singaporean earning, say, $1,500 per month won’t be saddled with the same 2.6% interest rate as a Singaporean earning $3,500 per month.
This will be helpful for lower income Singaporeans who already have very limited CPF savings, and are at serious risk of missing even the Basic Retirement Sum. On the flipside, a tiered interest rate system might discourage some homeowners from increasing their income, or encourage others from underdeclaring their income.
When every other solution appears to have its pros and cons, it’s not surprising that HDB would choose to maintain status quo when it comes to the sensitive issue of home loan interest rates.
Do you think HDB loans should be pegged to CPF rates? Voice your thoughts in our comments section or on our Facebook community page.
Want to know more about the HDB Concessionary Home Loan and using your CPF to finance your flat purchase? Check out Taking a HDB Loan: How the CPF rule change affects you and 9 Effects of Relaxing CPF Rules for Old HDB Flats
Looking for a property? Find the home of your dreams today on Singapore’s largest property portal 99.co! You can also access a wide range of tools to calculate your down payments and loan repayments, to make an informed purchase.
Great article Ryan. There is always something useful to take away.