The HDB concessionary loan is a facility that pretty much all Singaporeans consider when buying a HDB flat. It is often the ‘starting point’ of research into home loans. The most common selling point of HDB loans is that they have a higher Loan-to-Value limit (LTV), offering to loan you up to 90% of your new flat’s value. Although true in many situations, did you know that it is possible to not get the full 90% loan from HDB?
Why You Might Not Meet the 90% Eligibility by HDB
If you are in that boat and were offered a lower loan amount, it's too soon to think it's the end of your homeowning journey!
Here is a handy guide to explain why you may have landed in this scenario, as well as different ways in which you may be able to approach this situation without drastically affecting your current financial situation.
1. You Do Not Meet the MSR (Mortgage Servicing Ratio) /TDSR (Total Debt Servicing Ratio) Requirements
For example, consider Peter and Mary, a young couple who earn a gross monthly household income of $5,500. They already pay $700 a month on a new car and have their hearts set on buying a large resale DBSS flat in Bishan, valued at $1,000,000. Unfortunately, they weren’t able to get the full 90% loan from HDB. Why?
In order to be eligible for any mortgage loan in Singapore you will have to meet the requirements of a 30% Mortgage Servicing Ratio (MSR) and a 60% Total Debt Servicing Ratio (TDSR). They are calculated by the following:
MSR = (Monthly repayments on property loans / Gross monthly income) x 100%
TDSR = (Borrower’s total monthly debt / Gross monthly income) x 100%
In Peter's and Mary's situation, their current TDSR before the loan is 12.7%. However, the 90% HDB loan amount for their flat would amount to $900,000, and even assuming they chose a 30-year loan tenure at 2.6%, their monthly repayments would be $3,603.
$3,603 in property repayments on a $5,500 income means an MSR of 65.5%, and a TDSR (including the car instalments) of 78.2%. This is way beyond the permitted limits, and neither HDB nor any bank would offer them such a big loan.
If you are unable to meet the TDSR and MSR requirements like Peter and Mary, it might not be the right time for you to be looking to purchase a property, and you should consider opting for a rental while you clear some of your outstanding loans.
Alternatively, you could forgo your dream home and aim at a more affordable property instead in the meantime. Think of your first home as a starter project that will simply be a jumping point from which you can launch your second property once you manage your finances better and have a better income to bolster your debts.
2. You have an abundance of CPF OA savings which you must use
When you buy an HDB flat and take an HDB loan, a necessary first step is the wiping out of your CPF Ordinary Account savings (save for $20,000 you are allowed to keep in there). For the typical young couple that buys BTOs, this is not an issue as they have not had that much time to start earning and saving, and the HDB 90% loan amount takes them the rest of the way to their property's price.
However, for those who are buying BTOs later in life and/or who have much more in their CPF OA, HDB may not offer the full 90% loan if there is enough in your CPF to reduce the loan amount by more than the usual 10%. While this may be good news for those who don’t want to pay any cash downpayment, it can be undesirable for those who would rather leave more savings in CPF to accrue interest and grow.
In this case, it might be favourable for you to consider a bank loan instead. As banks do not have such criteria, you may want to take advantage of the lower-than-HDB interest rates to take a bigger loan. This way, you would be ‘earning’ money too, since the money that HDB didn't wipe out from your CPF would be earning accrued interest at the current rate of 2.5%, which is more than the mortgage interest you’re paying.
In what ways can a Bank Loan be a Better Option?
1. Bank Loans offer more choices
While banks can sometimes be stricter when it comes to missed payments and contract breaches, bank loans generally offer more options and choices, making it easier for you to find a package most suitable for your needs.
There is only one HDB loan, featuring an interest rate that hasn’t changed in over 10 years and fixed terms and conditions. On the other hand, there is a huge variety of bank mortgages - we have over 140 packages listed on PropertyGuru Finance! - which allow you to decide on your preferred interest rate, commitment period, and other contractual terms. Furthermore, there being only one HDB loan rate makes it impossible for you to take advantage of favourable market conditions when the opportunity arises. For example, many people have been getting SIBOR bank loans because they’re cheap now due to the uncertain economy.
2. Saving for Retirement by letting CPF to Accrue Interest
As bank loans do not force you to make your repayments with CPF, this can allow you to save up for a rainy day with the dependable CPF OA interest rate of 2.5% per year. This, though small, can provide couples with a nice buffer for rainy days should they decide to use their CPF for other matters such as their children’s university loans and so on.
This allows you more flexibility with your CPF account making sure that you are not tied down to completing your monthly repayments using your CPF and then should you choose to sell, you will have to pay back your CPF with the accrued rate that you would have missed out on if your money had sat in the OA instead.
You can read more about the opportunity cost of using CPF for your repayments here.
Potential Drawbacks of Bank Loans
1. Higher Upfront Cash Downpayment
When you opt for a bank loan, you will have to pay at least 5% cash downpayment for your property purchase. This is no small sum, which is why this can be a strong deterrent for younger couples who cannot afford the upfront amount. There is no such criteria for those who opt for a HDB loan and buy new flats directly from HDB. (For resale flat buyers taking an HDB loan, there are certain cash components like the option fee and deposit to seller, but these are typically only a few thousand dollars.)
2. Cannot switch back to an HDB Loan
If you choose a HDB loan initially, you can always refinance to a bank loan whenever you’re ready. However, if you choose a bank loan from the go, you cannot switch back to an HDB loan. This is why some first-timers feel ‘safer’ going for an HDB loan for their first mortgage before subsequently refinancing to a bank loan for cheaper rates.
If you are thinking of refinancing from an HDB loan to a bank loan, make sure you do the math and seek advice to ensure that you are really getting a good deal out of it. Yes, most people will indeed enjoy significant savings, but it never hurts to be too careful, especially since any mistake would be irreversible.
Still Unsure? Let Us Help
In order to consider the right bank loan for your financial situation, we suggest enlisting the help of professionals such as our Home Finance Advisors.
They will be able to help you shop for the best rates and recommend the most suitable mortgage packages for your needs. Homeowners are often burdened by the paperwork and the research needed to get a good bank loan and these licensed experts will be able to take the stress off your shoulders.
Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
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