For many Singaporeans, the biggest pushback when it comes to home loans is their fear of taking a bank loan and the perceived difficulty of managing it. Let's have a look at the differences between HDB loans and bank loans to ensure you make an informed decision with regards to your financial planning!
1. Loan Amount
Many believe that HDB would issue loans at the Loan-To-Value (LTV) ratio of 85%. However, not everyone can secure such a loan. HDB makes it mandatory for buyers to use more of their CPF-OA savings to pay for the down payment, before determining the loan amount. Currently, each individual can retain up to $20,000 in their CPF-OA while the remainder will be deducted for down payment of the HDB, and only the remaining amounts would be disbursed as a loan.
Meanwhile, a bank loan could allow greater savings in CPF. For example, if you were to secure a bank loan at an LTV of 75% at $375,000, you would only need to fork out 20% (i.e., $100,000) of the property value from your CPF. This means that you can retain up to $150,000 in your CPF-OA.
2. Defaulting on your loan & property closure
Many believe that even if they default on their HDB loan, HDB will be more forgiving and would not foreclose their property. In comparison, we have all heard stories of banks foreclosing on properties that have been defaulted with absurdly high interest rates.
If this is true, then everyone will exploit the loophole and choose to buy HDB under the HDB loan only to default on the loan!
The reality is that HDB acts like a financial institution (like any other bank) when a borrower defaults. While they are a statutory body, they will still impose higher interest rates on late payments and foreclose properties in severe situations.
Of course, borrowing from a governmental body also has its benefits. One of them is that you get more options if you are struggling to repay your HDB loan. You can choose to add your children as joint owners of the property if your children are working adults, which can help lighten your burdens as your children can help with the loan.
However, your children may face issues with owning a property of their own in the future. Under current HDB regulations, individuals cannot own more than 1 HDB. This means that your children would need to appeal to HDB to remove their name from existing property. With the poor credit history of the existing property, HDB might refuse the appeal, and there are generally lower chances of approval. Even if the existing property is sold and the issue of owning a HDB is resolved, the poor credit history may mean your children would have to pay higher interest rates in future mortgages that they apply for.
3. Interest Rate
For those who have yet to do the math, bank loans may appear to be daunting. Is this true? Let's look at an example.
When comparing a HDB Loan at 2.6% with a bank loan (assumed with 5-year fixed interest rate at 1.50%), you will still have significant savings even if interest rates run higher after 5 years. Choosing to take a bank loan over a HDB loan resulted in savings of $25,876 from the mortgage interest in the first 5 years, and the outstanding loan balance is also lower. Although interest accrued for bank loan is higher after the fixed-rate period (i.e., year 6 onwards), the fact is that we have saved $24,000 at the end of year 8 by choosing a bank loan.
It is also important to consider that banks typically do not have interest rates over 2.6%, as HDB mortgages contribute to a significant proportion of the market.
4. Using CPF account for monthly repayments
Many clients choose to stay with a HDB loan is because they believe that they cannot repay their monthly mortgage instalments if they take a bank loan.
Many also believe that the down payment of 5% cash and 20% CPF that is typical of bank loans applies to refinancing loans.
These two examples are a myth. These only apply to mortgages upon purchase of a property. Also, you are able to use your CPF for your monthly repayments after switching into a bank loan!
To conclude...
There are numerous misconceptions in the market that have led many to choose HDB loans, but this may not be the most financially advisable choice.
Bank loans can offer you better personal cashflows and could offer you greater liquidity to make your money work harder for you.
On the other hand, HDB loans could be useful if you have little savings and lack cash on hand. In this case, being able to tap on your CPF account for down payment and having lower initial cash outlay could be a wiser decision!
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