Choosing financing for your home is like a game of “Rathers”. You know, where everyone tackles hard questions like “Would you rather be whipped naked down Orchard Road, or rely on the MRT for transport?” But unlike a game of Rathers, home loan discussions are seldom accompanied by laughter and beer (unless you’re awesome). No, picking a home loan is a serious issue. To save you the brain drain, this article contrasts the ole’ HDB loan with a fancy bank loan:
What’s This HDB Loan Thing?
HDB concessionary loans are a provision for Singaporeans. The interest rate for a HDB loan is 0.1% above the current CPF rate. As of now (2012), that’s 2.6%.
While banks just check your credit, HDB loans have certain restrictions:
- It applies to HDB flats (Duh)
- At least one buyer must be a Singapore citizen
- Buyers’ monthly income must not exceed $10,000 (or $15,000 for extended families)
- Buyers must not own any private residence (in Singapore or overseas)
- Buyers must not have taken more than two previous HDB loans
- Buyers have not disposed of private residential property within 30 months before the loan application
These are just the most pertinent restrictions. There are others, for people who own and operate commercial properties.
How Does It Compare to a Bank Loan?
Depending on the current SIBOR / SOR rates, a bank loan can be better or worse than a HDB loan. Likewise, there are security issues that may appeal to some buyers. In general, a HDB loan is:
- More forgiving than a bank loan
- Higher on the interest rate
- Less intrusive to your cash flow
- More Helpful for the down payment
- No early repayment penalties
1. More Forgiving Than a Bank Loan
This is the biggest appeal of a HDB loan. Bankers have as much compassion as your average rock; fail on your loan repayment, and the frequency of your showers will start to depend on the weather. HDB, on the other hand, will do its best to defer your repayments.
Also, HDB caps your monthly repayments at 40% of your income. A bank loan has no such restriction: The amount you owe is the amount they expect, regardless of your circumstances.
2. Higher on the interest rate
As mentioned, the HDB loan rate is 2.6%, and seldom changes. Bank rates are more variable; they’re based on current SIBOR and SOR rates, which are usually cheaper. Bank interest rates typically range between 1.14% – 1.3% (as of May 2012).
The downside is that the bank’s rates are variable. You’re guaranteed the same interest rate for three to five years at best (fixed loan package). Beyond that, you’re at the mercy of the market. Also, banks have a huge range of different loan packages; If you don’t understand how to pick the best one, a HDB loan is a simpler choice.
Otherwise, visit home loan sites like SmartLoans.sg, which will display the interest rates of all local banks. From there, it might be a case of just picking the cheapest.
3. Less Intrusive to Your Cash Flow
If you need consistency in repayments, HDB loans win hands down. The HDB loan is based on the CPF, which changes as often as Edison Chen makes the news for good behaviour. The best a bank can do is to give you a fixed rate package, which lasts just three to five years.
So if you have a tight budget, pick the HDB loan. You’ll know exactly how much to set aside each month. As an added plus, HDB loans come with fewer clauses. You don’t need to worry about pre-payment penalties (see point 5), and deferred (late) payments are easier to negotiate.
4. More Helpful For the Down Payment
If you get a bank loan, at least 5% of the initial 20% down payment has to be in cash. You’d best prepare for an amount like $15,000, for even moderately sized property.
Before giving your patronage to the neighbourhood loan shark, consider a HDB loan. You can use your CPF money (if you have enough) to cover the entire down payment. If you’re just cash strapped for that initial 20%, access to your CPF could give you a wider range of property options.
5. No Early Repayment Penalties
If you attempt to pay off a bank loan early, there’s a hefty penalty. The bank was counting on making money off you via the interest rate, and
the minions of Satan the bank never gives up what they’re owed.
HDB is more relaxed. If you get a sudden windfall, you can rush your repayment. Remember, the faster you clear your debt, the less interest you end up paying. You might even plan for this; if you’re expecting a large cash infusion in 10 years, for example, you can get a HDB loan and plan to settle it quick.
With banks, attempting to pay early lands you a 1.5% prepayment penalty.
A HDB loan is better if you’re risk averse, or if there’s a chance you can pay off the loan early. It’s also useful if your career is just getting started: The down payment on your house is lower, and you have more chances with missed repayments.
But if you understand the housing market well, and you know how to refinance, the bank loan is ultimately cheaper.
Did you use a HDB loan or a bank loan? Comment and tell us your reasons!
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