Bank Loan vs HDB Loan | Loans Hacks
Should I take a Bank loan or HDB loan when Buying a flat?
In this video, we are covering two questions today. The first question is, “Bank loan vs HDB loan… Which is better?” The second question is, “What is the difference between repricing and refinancing?”
📌 Bank loan vs HDB loan: Financing options when buying an HDB flat
When choosing financing to buy an HDB flat, buyers will basically have two choices. One of them will be taking a loan directly from HDB, or what we call the HDB loan. The second option will be taking a bank loan, which is taking a loan from a financial institution. The rules are different for these two loans. So I’ll start off by explaining the HDB loan first.
The interest for HDB loans is 2.6% per annum. It is much higher than the current bank rates, which is between 1.2% to 1.4%. Now that you are aware of the difference between both interest rates, we will go straight to the reasons why people know that the HDB interest rates are higher, but they are still going for it.
📌 Bank loan vs HDB loan: Loan to Value Ratio
The first reason is the loan to value ratio. For HDB loans, it is up to 90%. Whereas for a bank loan, it is up to 75%. This means that the highest loan amount you can get for HDB flat is 90%.
This is very helpful for people who are cash tight. Although HDB can loan up to 90%, there is one catch. You must wipe out your CPF Ordinary Account (OA) first, then they will lend you the balance.
📌 Bank loan vs HDB loan: Cash Proceeds from an earlier purchase
As a Singaporean, you can take up to two HDB loans. If you wish to take a second HDB loan, you will need to set aside half of the cash proceeds from the first house you sold.
For buyers who want to keep the cash proceeds from the first house they have sold, then an HDB loan would not be such a viable option for you. You might want to go for a bank loan for the second purchase.
To make full use of your HDB loans, most buyers will tend to buy a bigger HDB for their first loan, while the second purchase will be smaller. So go for a bigger HDB flat if possible for your first loan.
📌 Bank loan vs HDB loan: Downpayment
The third consideration is the downpayment required. As we have discussed earlier, when choosing to take an HDB loan if the criteria are right, you do not come up with any cash down payment except for the initial cash deposit. When you are able to loan up to 90%, that means you can use CPF for the remaining 10%.
Meaning to say if the house has no Cash Over Valuation (COV), you don’t pay any cash for this purchase.
But if you choose to go with a bank loan, you have to keep in mind that the ratio is up to 75%. 20% is covered by CPF, but this 5% is compulsory to be paid in cash. So for people who can afford the cash, they will go for a bank loan.
So for buyers who are CPF rich but they’re tight on cash, they will go for an HDB loan. Although the rates are higher, they don’t have that much cash. So this is something you have to consider, do your due diligence and work out your finances. If you feel like that 5% cash is a bit too much of a stretch and if you qualify for the HDB loan, then go for it.
📌 Bank loan vs HDB loan: Loan Contract Terms
Contract terms are more favourable towards HDB loans because there is no lock-in period. There is also no penalty for early repayment. In a way, HDB is still a Government body, unlike the commercial banks where they are profit-driven. So if you sign up with a bank for a lock-in period of two to three years and you pay early, they will have a penalty between 1% – 1.5%.
Some people classify this as a clawback. For certain bankers, they will use that term.
📌 Swapping between Bank Loan vs HDB Loan
An important tip is that you can choose to switch to a bank loan when you are on an existing HDB loan. I am on an HDB loan package and I am considering going to a private loan package at the moment.
So this is a money-saving tip. Assuming you are qualified, go for an HDB loan first and later convert to a private bank. But do keep in mind that if you are on a private bank loan, you cannot convert it to an HDB loan package. So it only works from HDB to private, but not the other way around.
If you are still uncertain or unsure which loan packages to go for or how to go about your financing or calculation, feel free to call us at any time. We will be able to give you the right advice.
📌 Differences between Repricing vs Refinancing
This brings us to repricing vs refinancing because I think this question is also linked to this home loan issue. In layman terms, repricing or refinancing both serve a common objective: to find cheaper bank rates.
For repricing, it means sticking to the same bank. This means you do not change the bank. Or you ask the bank for a lower package or a more attractive package that is likely to be lower than now. Repricing is much simpler because you are staying with the same bank. There will be no reassessment fees, such as performing another home valuation or reassessing your income.
In my opinion, if the current bank rate is good, stick to the same bank so there will be fewer legal and admin fees.
Refinancing is to change bank. Let’s say you are with Bank A, and you found Bank B that offers a much lower interest rate. So this is called refinancing when you decide to switch over to Bank B. Both serve the purpose of bringing down your interest rate payments but refinancing means that the bank is new. You will need to do your income assessment and more paperwork. An estimation of the legal and valuation fees will likely be more than $2,000.
📌 Save potentially hundreds or thousands of dollars with this tip
A tip for the reader: you should reprice or refinance only when the savings is more than the cost. You need to have savings after you have done your calculation. Here is a guide, if your loan is about two to three years back, there is a good chance you can reprice or refinance because interest rates are much lower now.
So do make this effort to call your bank and ask them what is their current best rate. If there’s a difference, ask them what is the lock-in period for your package and what are the penalties if I do a repricing or refinancing.
This phone call will save you potentially hundreds or thousands of dollars.
What a lot of people don’t realise is that they just let their loans run as per normal. They are so used to seeing that. But sometimes they may not realise that there is money to be saved here. If you just make a simple phone call and do a reassessment, you can save $150 to $200 every month.
So always check and be updated on the latest interest rates. So if any questions just give us a call or drop us a message in the contact form below. We can explain this privately to you in detail.
📌 HDB Top 10 Questions
- Where are the Million dollar HDB?
- Which are Hottest HDB towns in 2021?
- Is Cash Over Valuation (COV) making comeback?
- How to Unlock the Value of Our HDB?
- Upgraders Dilemma: Sell First or Buy First?
- Should I buy an older Resale HDB?
- BTO or Resale or EC: 3 Test Qns
- HDB or Bank Loans? What is Repricing?
- 3 Important Questions to Ask Before Buying
- 5 Commonly Asked HDB Rules or Terms
Check out all HDB Top 10 Questions here
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