HDB loan vs bank loan: which is better? That’s the question most homeowners are likely pondering over when choosing an option to finance their HDB flats. Some prefer taking on bank loans instead of paying for their homes with CPF. Others argue that HDB loans provide stability and certainty.
The greatest rate rise since 1994 was announced by the US Federal Reserve on 15 June 2022. It was a 0.75% point-rate increase. More recently, on 29 June 2022, DBS increased the rates on all home loan packages to 2.75% per annum. Before this, UOB and OCBC were the first to raise their rates on their home loan packages.
During the pandemic, interest rates were near-zero which made taking a bank loan more attractive. But now, the era of low interest rates is over, with banks increasing their rates on home loan packages and interest rates are expected to rise further. So, for HDB homeowners, should you still go for a bank loan?
In this article, we compare the difference between an HDB loan and a bank loan so you can make a better, more informed choice. Let’s get started!
HDB Loan Vs Bank Loan: An Overview
Both the HDB Concessionary Loan (better known as the HDB housing loan) and bank loans have a list of advantages and drawbacks but, as with almost anything home loan-related, what worked out for someone else, might not work for your situation. Here’s an overview of their main differences.
| HDB housing loan | Bank loan | |
| What is it | Home loan from the Housing & Development Board (HDB) | Home loans from banks in Singapore, e.g. DBS, UOB, etc |
| Borrower eligibility | Several requirements are in place such as income ceiling and citizenship requirements | Usually, a good credit score will suffice, no income ceiling |
| Property eligibility | HDB flats only | Both HDB flats and private property |
| Minimum loan size | None | Usually at least $100,000 |
| Loan-to-Value limit | Can borrow up to 85% of property value | Can borrow up to 75% of property value |
| Downpayment | 15% of the purchase price, can be fully paid with CPF Ordinary Account (OA) savings. Note: for resale flats, you need to pay up to $5,000 for a deposit to the seller. | 25% of the purchase price, at least 5% must be in cash (Up to 20% from CPF OA savings) |
| Interest rates | Currently, 2.6% p.a., pegged at +0.1% of CPF OA interest rate | Currently, as low as 1.73% floating rates or 2.75% fixed rates*, but depends on the market situation |
| Maximum loan tenure | Up to 25 years | Up to 30 years |
| Prepayment or early repayment penalty | None | Usually 1.5% to 1.75% |
| Late repayment penalty | 7.5% p.a. | Depends on the bank, but usually not as lenient as HDB |
Source: HDB , PropertyGuru Mortgage Tool
*Interest rates updated as of 1 July 2022. Throughout the article, we will be referencing these rates for bank loans.
Now, before we go further, you’ll need to first ask yourself: which housing loans are you eligible for?
HDB Loan Vs Bank Loan: Eligibility Criteria
Sometimes, you may not have a choice on which of the two loan types to take. As you may have noticed, if you are looking to finance a private property (i.e. condo or landed home), then you are not eligible for HDB housing loans. Your only option is to go with a bank loan.
If you’re buying an HDB flat, be it a new or resale flat, hurray! You may be eligible for an HDB housing loan.
HDB Loan Eligibility
We use ‘may’ because the HDB loan eligibility criteria are quite stringent. Here, have a look:
| Citizenship | At least 1 buyer is a Singapore Citizen |
| Household status |
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| Income ceiling | Must not exceed:
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| Property ownership | You don’t own any other property locally or overseas and haven’t disposed of any within the last 30 months prior to applying for your HDB Loan Eligibility letter. You also don’t own more than 1 market/hawker stall or commercial/industrial property. If you do own one of these, you must be operating your business there and have no other sources of income |
If you’ve decided you want to take on an HDB loan, you have to secure an HDB Home Loan Eligibility (HLE) letter. For a more detailed breakdown of the HDB loan eligibility, you may visit the HDB website!
Related article: HDB HLE Application: 6 Important Things HDB Flat Buyers Need to Know About HDB Loan Eligibility in Singapore (2022)
Bank Home Loan Eligibility
The eligibility criteria for a bank loan aren’t as stringent as HDB’s. Each bank has its own method of assessment, but generally, as long as you are in good financial health and have a good credit score, you’re good.
If you’re not sure what the bank loan criteria are or which bank to approach, you can approach one of our friendly Mortgage Experts for help.
For Both HDB and Bank Loans, TDSR and MSR (for HDB Flats) Will Apply
Next up, remember that regardless of HDB or bank loan, the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) restrictions will apply. These frameworks are put in place by the Government (and not HDB, or the banks) to ensure people don’t borrow more than they can afford.
Total Debt Servicing Ratio (TDSR)
Whichever you pick, all home buyers will also be restricted by the TDSR. The new property cooling measures saw the TDSR revised from 60% to 55%. Basically, how much you can borrow will be limited by your monthly repayments, which cannot exceed 55% of your monthly income.
The TDSR is a restriction for all your liabilities (so not just your mortgage), which means that if you’re already servicing multiple loans, you might not be able to take out a housing loan (or may have to loan less).
Mortgage Servicing Ratio (MSR): For HDB Properties Only, Including EC
If you’re buying an HDB property (including executive condominiums), you will also be restricted by the MSR which states that your monthly repayments for a mortgage cannot exceed 30% of a borrower and/or joint borrower’s monthly income.
Now that we’re all clear on the loan eligibility and government restrictions, let’s get down to comparing the HDB housing loan and bank loans.
HDB Loan Vs Bank Loan: The Key Differences
Assuming you’re eligible for both the HDB housing loan and bank loans, here are the key differences between the two.
| HDB housing loan | Bank loan | |
| Loan-to-Value (LTV) limit | Can borrow up to 85% of property value | Can borrow up to 75% of property value |
| Downpayment | 15% of purchase price, can be fully paid with CPF OA savings. | 25% of purchase price, at least 5% must be in cash, the rest can be paid with CPF OA savings |
| Minimum loan size | None | Usually at least $100,000 |
1. Bank Loans Have a Tighter LTV, but Borrowing Less Also Means More Savings in the Long Run
HDB Housing Loan LTV: Up to 85%
Previously, the HDB housing loan could cover up to 90% of the purchase price for new flats, and the lower of either the resale price or market value for resale flats. However, the new December 2021 Singapore property cooling measures saw the LTV for HDB-granted loans being adjusted to 85%, reducing the maximum amount future homebuyers can borrow from HDB.
Still, having the LTV set at 85% means you can borrow a considerable sum. Although it may seem like a good thing that you can borrow more funds, getting a bigger loan could mean you end up paying more interest in total.
Also, do note that the 85% limit is subject to CPF balances. HDB requires each lessee’s CPF Ordinary Account (OA) balances to be wiped out (except for a maximum amount of S$20,000). This means that if you have a substantial CPF balance, you may not be able to obtain an 85% LTV loan. This isn’t the case for bank loans.
Bank Loan LTV: Up to 75%
In contrast, bank loans cover only up to 75% of the purchase price. This 15% difference is significant as it would mean a much larger downpayment, which can put a real dent in your finances, especially if you are tight on cash and/or CPF savings.
If, after assessing your finances, you find that you can afford the cash outlay required for bank loans, the lower interest rates and smaller loan size will result in more savings overall.
Related article: CPF for Housing Loan in Singapore: Can I Use CPF to Buy Condo or HDB Flat? Yes, but Here Are 4 Reasons Not To
2. Bank Loans Require a Higher Downpayment, Which Can Be Difficult for Cash Flow
As seen in the previous section, HDB allows you to borrow more than banks. This, in turn, would also mean a more manageable downpayment of 15% (as opposed to 25%).
With both HDB and bank loans, you can make use of your CPF OA savings to service the downpayment. However, there is a difference in how much you can use in the longer term, and hence, how much cash you’ll have to pay upfront.
HDB Housing Loan Downpayment: Minimum 15%, Can Be Fully Paid with CPF OA
Assuming a direct purchase, when you take out an HDB housing loan, the minimum downpayment is 15%, which you can pay off fully with your CPF if you have enough savings in your Ordinary Account. This means you may not need to fork out a single cent (for your downpayment at least).
Bank Loan Downpayment: Minimum 25%, of Which 5% Must Be in Cash
Bank loans require a significantly higher downpayment of 25%. Of that, at least 5% needs to be made in cash, while the remaining 20% can come from housing grants or your CPF.
Related article: CPF Housing Grant Eligibility in Singapore: How Much BTO, Resale Flat and EC Buyers Can Get (2022)
Have difficulty visualising how the percentages translate into dollars and cents? Here’s an example.
Let’s Say You Buy a $600,000 Home
| If you take an HDB loan | If you take a bank loan | |
| Total downpayment | $90,000 (15% of $600,000) | $150,000 (25% of $600,000) |
| How much CPF OA can you use? | $90,000 (full amount of the downpayment) | $120,000 (20%) |
| Cash upfront | If you have enough in your CPF OA, no cash is needed | $30,000 (5%), and the difference that is needed if CPF OA is not sufficient to cover the full 20% |
Exception: If you are buying a resale flat, you will need to account for the deposit to the seller, which is an upfront cash cost that can go up to $5,000.
Related article: HDB Flats in Singapore: HDB Resale Appreciation for BTO Price vs HDB MOP Resale Price 5 Years Later (2022)
You can also use the CPF housing usage calculator to calculate how much of their CPF you can use for your property purchase. Also use our affordability calculator to see how much your downpayment, monthly instalment and length of loan tenure is, among other factors.
Generally, the HDB housing loan usually requires less cash downpayment upfront, which is preferable for those with limited cash savings and/or cash flow issues, like many young couples buying their first BTO.
Related article: Young Couple, Older Flat in Singapore: What Are Some Challenges You Might Face? (2022)
That said, always remember that while HDB housing loans require less upfront, they can be more expensive overall, especially if you take a bigger loan to reduce your downpayment. Bank loans require a higher downpayment but offer more potential cost savings if you can afford the upfront cost.
3. HDB Housing Loan Interest Rates Are More Stable
| HDB housing loan | Bank loan | |
| Interest rates | Currently 2.6% p.a., pegged at +0.1% of CPF OA interest rate | Currently, as low as 1.73% floating rates or 2.75% fixed rates*, but depends on the market situation |
| Types of packages | Only one type | Fixed and floating rate packages are available |
| How stable is it? | Stable, interest rate hasn’t changed since 1999 | Can fluctuate, interest rates offered depend on market conditions and are only for a few years |
HDB’s interest rates haven’t changed in over two decades, which may be preferable for the risk-averse. Conversely, bank home loan interest rates are more volatile, which is more suitable for those with a bigger risk appetite.
HDB Loan Interest Rate: 2.6%, Hasn’t Changed Since 1999
The HDB loan interest rate is pegged at +0.1% of the prevailing Central Provident Fund Ordinary Account rate. The CPF rate, in turn, is based on the average interest rate offered by the major local banks over a three-month period or a minimum of 2.5%, whichever is higher.
As of the time of writing, the interest rate for HDB loans is 2.6% p.a. This rate is higher than what most banks offer, and hasn’t changed since July 1999.
Bank Loan Interest Rates Are More Volatile
Banks offer two types of loans: floating rate packages and fixed rate packages. Floating rate packages are pegged to a benchmark interest rate, with a spread that’s fixed for the lock-in period. Floating rates are more volatile as they fluctuate with the benchmark rate, usually according to market conditions.
Related article: SIBOR vs SOR vs SORA: What Do These Rates Mean for Your Home Loans?
Fixed-rate packages, on the other hand, guarantee you a certain rate for an agreed lock-in period. Although fixed rates are more stable, you’ll only be guaranteed the same interest rate for a few years (3 to 5 years at most). Also, due to this relative stability, fixed rates are often offered at a premium compared to variable rate packages. After the lock-in period, your interest rate will depend on the whims of the market (read: it usually goes up!).
Given that monthly payments are predictable, a fixed rate may enable better planning. The flexibility of a floating rate package, however, allows borrowers to refinance sooner or make partial payments.
Related article: Fixed vs Floating Rate Home Loans in Singapore: How to Pick the Right One (2022)
Currently, the lowest floating rate is 1.73% while the lowest fixed rate is 2.75% (as of 1 July 2022). The existing bank floating rates on the market are lower than HDB’s 2.6% interest rate. But the downside is that bank’s floating rate loan packages are more prone to fluctuation, as they are pegged to a benchmark rate.
Banks also can and do adjust their fixed rate loan packages. Recently, DBS removed their five-year fixed rate loan package, and now has the highest fixed-rate packages (two-year and three-year fixed rate packages at 2.75%), compared to other major banks. Similarly, OCBC increased its two-year fixed package to 2.65% and UOB increased its two-year and three-year fixed-rate package to 2.98% and 3.08%, respectively.
4. You Can Refinance From an HDB Loan to a Bank Loan, but Not the Other Way Around
| HDB housing loan | Bank loan | |
| Refinancing options | Can switch to bank loan | Can refinance with other banks, but cannot switch back to HDB housing loan |
| Minimum loan size | None | Usually at least $100,000 |
| Prepayment or early repayment penalty | None | Usually 1.5% to 1.75% |
| Late repayment penalty | 7.5% p.a., but can be negotiated | Depends on the bank, but usually not as lenient as HDB |
If, after a few years, you decide you want to switch from an HDB housing loan to a bank loan for lower interest rates, you can do so. However, the reverse is not possible.
If you opt for a bank loan, you are automatically disqualified from switching (or switching back) to an HDB housing loan. Instead, after your lock-in period, you will have to either reprice with a new package from the same bank or refinance with another bank. For example, after a 3-year home loan with DBS, you will need to decide if you want to negotiate for a new DBS home loan or look for other banks (like OCBC, UOB, etc) to loan from.
Related article: DBS Home Loan Review: Fixed vs Floating, SORA, BUC Packages and More (2022)
If you’re currently on a bank loan and are puzzled by the concept of refinancing to actively manage your home loan, feel free to reach out to PropertyGuru’s Home Finance Advisors for some free advice and guidance.
5. There Are Higher Penalties When It Comes to Bank Loans
With tenures spanning several decades, a home loan is a long-term commitment. As such, it’s important to consider your future plans at each stage of your decision-making.
Generally, HDB loans are more flexible in that there is a lot more wriggle room for changes in your financial situation. If you stumble onto a windfall (maybe you struck 4D?), you can pay off however much you want without penalty. If, after a few years, you decide you want to switch to a bank loan for lower interest rates, you can do so as well.
Related article: How to Refinance HDB Loan to Bank Loan in Singapore (2022)
If you run into financial difficulties (choy!), there is a late repayment fee of 7.5% p.a. (on the amount that is late, not the full loan), but you can appeal your case. HDB is known to be more lenient than banks.
For bank loans, there is usually a penalty of 1.5% to 1.75% if you decide to make early repayments within the lock-in period to reduce your loan size. Banks’ late repayment fees differ from bank to bank and are much harder to get waived or reduced.
In the event of a default in mortgage payments, banks may explore debt consolidation plans/restructuring programmes with you to help improve your situation. If nothing can be done, the bank has the right to repossess the property and put it up for a mortgagee sale (auction) as a last resort to recover whatever you owe.
HDB Loan Vs Bank Loan: Which Should You Pick?
If you’ve gotten this far and are still on the fence, here’s one last question to ask: are you motivated by cost savings, or are you the kind who won’t mind paying a little more to avoid the hassle? This may influence whether an HDB or bank loan is more suitable for you.
HDB Housing Loans Are More Expensive, but Less Hassle
Although featuring what’s currently a higher interest rate of 2.6% p.a., an HDB loan, once locked in, more or less looks after itself. The interest rates for an HDB loan are consistent and stable, making it easier to do long-term planning as you know exactly how much you’ll need to set aside every month for repayments.
Also, since a lower downpayment is required, if you’re tight on cash, an HDB loan may be more manageable. They also don’t have prepayment penalties and if you have to defer payment for any reason, it’s easier to negotiate with HDB.
If, after several years, your finances improve and you want to switch to a bank loan, you are free to do so.
Bank Loans Are Not as Low as Before
Most homebuyers who pick bank loans do so because of the significant savings that come with lower interest rates. However, as mentioned, to enjoy this, you must first make sure you can afford the minimum 25% downpayment.
Now it boils down to the question, fixed or floating rate? If you are one to not like risks, a fixed rate would be the best option for you as fixed rates will not vary as much.
Related article: “We Always Knew We Were Paying More”: After 9 Years, This Singaporean Couple Finally Decided to Refinance their HDB Loan
There is no right or wrong here: While some customers see taking an active interest in their loan as a small price to pay for the potential savings that can be made by refinancing, others may prefer the lower maintenance of the HDB loan.
So, what can homeowners do during such volatile market conditions? According to Paul Wee, Vice President, PropertyGuru Finance, PropertyGuru Group, there are five steps you can consider taking:
- Refinance to fixed-rate loan packages to mitigate the likelihood of higher SIBOR or SORA reference rates.
- Consider making partial or full repayments if rates become too high via cash and/or CPF to manage cash flow demands.
- Consider increasing the use of CPF for monthly loan servicing.
- Split or refinance loans into separate fixed or variable loans to spread the risk between two portfolios.
- If a homeowner is currently on a SIBOR-linked home loan package, he or she may consider moving to a SORA pegged one, as the latter is a backward-looking rate, and rate increases will lag the former. In addition, SIBOR will cease to be quoted from 2024. Banks may also possibly withdraw SIBOR packages earlier, compelling clients to move to other available packages and exacerbating the risk.
Nevertheless, as interest rates are rising, it’s important to practice caution!
Thinking of getting a bank home loan? Compare the best mortgage rates on PropertyGuru Finance, or contact us for more personalised advice and recommendations:
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