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HDB Loan vs Bank Loan: Which Home Loan Is Better For You?
The freedom to choose between an HDB loan or a bank loan provides a lot of flexibility in the way you finance your home. There are advantages to both types of loans, and some major differences between them which you should know about before you choose which to apply for.
HDB loans
Since HDB loans are provided by the government to put home ownership within the reach of most citizens, the terms tend to be more lenient, but there are also more regulations. For example, an HDB loan will give you more peace of mind if your financial plans go pear-shaped, since the Housing & Development Board can defer payments for a time until your situation improves.
But getting an HDB loan won't be possible if you (as a single) earn more than $5,000 ($10,000 for families) per month, or if you are a permanent resident. You also won't be eligible if you own any residential property or more than one commercial property. Since HDB loans are granted with a maximum tenure of 25 years, they may not work for you if you prefer to make smaller monthly payments over a longer time frame.
For these and other reasons, you may find a bank loan will fit your needs better than an HDB loan.
Bank loans
Bank loans may provide tenures of up to 30 years if you pay 40% of your new home as a down payment. If you are willing and able to pay 40% of your home up front, you can then enjoy a relaxed 30 year tenure to pay off the loan for the remaining 60%. If you can only afford to put down 20%, you will get a tenure of no more than 25 years, as with an HDB loan.
Bank loans require a minimum down payment of 20% (at least 5% in cash) so they are well suited to individuals who can afford to put down a large down payment and take a smaller home loan. HDB loans only require a 10% down payment, so these might work better for you if you prefer a smaller down payment and a larger loan.
Another reason why you may want to take a bank loan is if you have already taken two or more HDB loans, as you won't be eligible for another. If you want to buy multiple properties as an investment, you'll have to get bank loans.
Executive Condominiums (ECs) are also off limits where HDB loans are concerned, so if you want to move up-street, then a bank loan is your only choice (aside from paying out of your pocket).
Differences between HDB loans and bank loans
Interest rates tend to be lower for bank loans than for HDB concessionary loans. That's because the HDB loan rate is fixed for the loan's tenure (duration of the loan) and is 0.1% above the prevailing CPF interest rate.
Bank loan rates are variable, but can at times be as much as 1% lower than HDB rates, and that means big savings on the overall cost of a flat or other property. Of course bank interest rates can also move higher, so if you expect interest rates to rise and prefer to lock-in a fixed rate, then an HDB loan may suit you better.
Bank loans do offer more options when it comes to interest rates, with some banks letting you opt for loans with interest rates pegged to their fixed deposit interest rates. Most banks use interest rates that follow SIBOR.
If you plan to refinance your home for a lower interest rate at least once in the future, then a bank loan is the best type of loan for you, as it gives you more flexibility to refinance through a different bank or offer if you choose to.
There is one thing I consider to be a downside to bank loans: in most cases if you want to pay off your loan faster by paying larger amounts, you will have to pay prepayment fees during the lock-in period which is typically 2-3 years, depending on the loan type.
Basically, banks will punish you for paying off your debt faster, to make up for the interest payments they miss out on when you pay off your debt early. An HDB loan gives you the flexibility to quickly pay off your debt without being penalized if your income increases (inheritance, bonus, etc.) and you choose to pay off your home ahead of schedule.
This article was originally on the GET.com blog at: HDB Loan vs Bank Loan: Which Home Loan Is Better For You?.
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