The New POSB HDB Loan: What’s The Big Deal?

If you’ve been paying attention to the news recently, you’d have noticed that POSB’s got a new HDB home loan package that’s creating quite some buzz and getting HDB owners and buyers both excited and wary at the same time. In this article, we examine one of the most serious contenders to HDB loans we’ve ever seen.

So whether you’re thinking of buying an HDB resale or BTO flat, or thinking of refinancing your existing loan from HDB (the HDB Concessionary Loan), you’ll definitely want to know about this:

 

Not pictured: Affordability.

 

What is The New POSB HDB Loan?

The POSB HDB Loan is targeted at existing HDB flat owners (who are currently on the HDB Concessionary Loan), resale flat buyers and BTO flat buyers (BTO flats that are nearing completion). It’s a floating rate package with an interest rate going at a 3 Month SIBOR + 1.38% for the first 10 years; followed by 3 Month SIBOR + 1.48% thereafter.

(If that percentage also matches how much you understood, look here first).

But now the important bit: This package’s interest rate is capped at the CPF Ordinary Account rate (currently 2.5%) for the first 10 years. So for the next decade, this loan is guaranteed to never cost more than the HDB Concessionary Loan (pegged at 0.1% above the CPF OA rate, or 2.6%).

A quick dollar comparison:

Let’s assume a loan of $320,000, with a 30 year loan tenure. At the end of that, the HDB Concessionary Loan (2.6%) would have cost about $141,000 in interest. The POSB HDB Loan at the current rate (1.76%)* would cost about $92,000 in interest.

Even if home loan rates were to skyrocket, and the POSB HDB Loans hits the cap of 2.5%, the interest payments would be $136,000+.

After 10 years, the interest rate cap will be removed and the rate will increase slightly to 3 Month SIBOR + 1.48%. You will be fully exposed to prevailing market rates then; during which you can check the market for better deals again.

*1.76% is calculated based on the current 3 Month SIBOR of 0.38% (0.38% + 1.38% = 1.76%)

 

Who is This Good For?

 

House key

Don’t bother with that. We can’t afford anything valuable to put IN the house.

 

Let’s see. This package is a compromise, between the fluctuating risks of bank loans, and the security of the HDB Concessionary Loan.  So I’m going to guess middle aged drivers, who break speed limits while wearing seat belts.

It will appeal most to:

  • Risk averse HDB buyers intending to sell or upgrade in 10 years
  • HDB owners currently utilizing the HDB Concessionary Loan

 

Risk averse HDB buyers intending to sell or upgrade in 10 years

The POSB HDB Loan allows slightly more “risk averse” HDB buyers (who have a tendency to gravitate towards the HDB Concessionary Loan) to enjoy the lower floating interest rates currently offered by banks, while having that peace of mind that any extremely fluctuation is mitigated by the interest rate cap at the CPF Ordinary Account rate. This loan makes even more sense if you already believe you will be selling off the HDB within the next 10 years (since the protection would have expired by then).

HDB owners currently utilizing the HDB Concessionary Loan

Similarly, if you are an existing HDB owner utilizing the HDB Concessionary Loan and think you’ll be selling off the flat within the next 10 years, the POSB HDB Loan is a no-brainer option you should switch to. You only stand to gain and have nothing to lose. POSB is also offering a legal fee subsidy of $1,800 for HDB owners to refinance (with a minimum outstanding loan of $100,000).

If you need help with refinancing, check out SmartLoans.sg and thank me later.

 

Who Shouldn’t Take This Loan?

Extremists on both ends of the risk spectrum. People who see bankruptcy lurking in every transaction, as well as those who’d stick a hand in a shark tank to see what happens. Then, of course, there are the ones who simply can’t afford this option.

You can group these into:

  • Risk takers, who want even bigger rewards than what the POSB HDB Loan allows
  • Long term, risk averse flat owners
  • Buyers who can’t make the down payment

 

Risk takers, who want even bigger rewards than what the POSB HDB Loan allows

 

Ooh, friendly game! Honey, swing by the ATM and withdraw our life savings would you?

 

As mentioned earlier, POSB’s HDB Loan starts off at a 3 Month SIBOR + 1.38% which based on today’s current rates, translates to about 1.76%. Right this second, at least one of you is rolling your eyes. Because 1.76%, pfft, that’s expensive.

Hell, there are bank loans that currently go as low as 1.3%,” you’re thinking,  ”And as for 10 years…well, I don’t even know what I’m betting on my next hand in 15 minutes, let alone the deal with my home loan 10 years from now.”

Fair enough. If you’re the gambling type, who doesn’t care about potential rate hikes, this isn’t the package for you. There are more rewarding ones on the market. Go over to SmartLoans.sg and nag the mortgage specialists into finding them for you.

Long term, risk averse flat owners

For long term, risk averse owners, who are intending to live in their flat well beyond the next 10 years, this package might not provide enough security.

We don’t know what the situation will be in 15 to 20 years. Should the SIBOR rate return to 3% – 4%, you could be faced with an interest rate of 5%+ (1.48% + the prevailing rate). And because you can’t revert to the HDB Concessionary Loan, you’d be stuck with high monthly payments for the rest of the loan tenure.

Buyers who can’t make the down payment 

The HDB Concessionary Loan finances up to 90% of the flat, and the remaining 10% can come from your CPF. Bank loans can only finance up to 80% of the flat, with 15% coming from CPF and 5% in cash.

So to take the POSB HDB Loan, you’d need at least 5% of the flat’s down payment in cash. If upfront cash is a problem for you, you might want to stick to the HDB Concessionary Loan.

 

Risk Classification

 

Rolling dice

And if you wave your finance degree while doing it, it counts as strategy.

 

Before switching, match your risk appetite to the following categories. That ought to keep you on the right track somewhat. I don’t want to frustrate the gamblers, and grow new ulcers in the paranoid.

Low Risk Appetite = You want the 2.6% HDB Concessionary Loan. Also, some Yanni CDs and a Xanax.

Average Risk Appetite = Yep, you want this package. POSB HDB Loan at around 1.76%, capped at 2.5% for 10 years.

High Risk Appetite = You’re the reason they hang “Keep Out” signs in the zoo’s lion enclosure. Floating rate bank loans that are maybe at 1.3% or under FTW.

 

Image Credits:
abdul/yunir, adelle roux, shaond, Geroithe, Daniel Dionne

Would you take this home loan? Comment and tell us why (or why not)!

Get more Personal Finance tips and tricks on www.MoneySmart.sg

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