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.
During the COVID-19 pandemic, interest rates were near-zero but that era of low mortgage interest rates is over. The US Federal Reserve has been steadily raising interest rates, with the fourth consecutive 0.75-point rate hike expected on 2 November 2022, bringing rates to 3.75% to 4%. Mortgage interest rates have risen in tandem, with local banks adjusting their offered loan packages.
With the expectation that interest rates are expected to rise further, should HDB homeowners still go for a bank loan? Or is an HDB loan a better choice? In this article, we compare the difference between an HDB loan and a bank loan so you can make an informed choice.
- HDB Loan Vs Bank Loan: An Overview
- HDB Loan Vs Bank Loan: Eligibility Criteria
- HDB Loan Eligibility
- Bank Home Loan Eligibility
- For Both HDB and Bank Loans, TDSR and MSR (for HDB Flats) Will Apply
- What Is the Total Debt Servicing Ratio (TDSR)?
- What Is Mortgage Servicing Ratio (MSR): For HDB Properties Only, Including EC
- HDB Loan Vs Bank Loan: Which Should You Pick? 5 Things to Consider
- Bank Loans Have a Tighter LTV, but Borrowing Less Also Means More Savings in the Long Run
- Bank Loans Require a Higher Downpayment, Which Can Be Difficult for Cash Flow
- HDB Housing Loan Interest Rates Are More Stable
- You Can Refinance From an HDB Loan to a Bank Loan, but Not the Other Way Around
- There Are Higher Penalties When It Comes to Bank Loans
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. Here’s an overview of their main differences.
| Loan type | 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 80% of property value | Can borrow up to 75% of property value |
| Downpayment | 20% 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, from 2.70% for floating rates or 3.45% for fixed rates*, but depends on the market situation |
| Types of packages | Only one type | Mostly floating rate packages, some fixed rate packages and hybrid packages |
| 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., but can be negotiated | Depends on the bank, but usually not as lenient as HDB |
Source: HDB, PropertyGuru Finance Mortgage Tool
*Best interest rates offered on the market, updated as of 27 October 2022. Throughout the article, we will be referencing these rates for bank loans. For the latest rates, you may check PropertyGuru Finance.
With almost anything home loan-related, what worked out for someone else, might not work for your situation 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
If you are looking to finance a private property (e.g. condo or landed home), then you are not eligible to apply for an HDB-granted loan. Your only option is to go with a bank loan. But if you’re buying an HDB flat, be it a new or resale flat, hurray! You may be eligible for an HDB loan.
HDB Loan Eligibility
| Citizenship | At least 1 buyer is a Singapore Citizen |
| Past home loan and/or ownership | Have not previously taken two or more HDB housing loans and have only taken one HDB housing loan and the last property you owned wasn’t a private residence (local or overseas) such as: HUDC flat, property acquired by gift, property inherited as a beneficiary under a will or as a result of the Intestate Succession Act, property owned/ acquired/ disposed of through nominees |
| Income ceiling | Must not exceed $14,000 for families, $21,000 for extended families, and $7,000 for singles buying a 5-room or smaller resale flat or a 2-room new flat in a non-mature estate, under the Single Singapore Citizen (SSC) Scheme |
| 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. Read our guide for a more detailed breakdown of the HDB HLE application process or head over to the HDB website.
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.
What Is the Total Debt Servicing Ratio (TDSR)
Whichever you pick, all home buyers will also be restricted by the TDSR. The December 2021 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).
With the announcement of the September 2022 property cooling measures, there will also be an 0.5% increase in the interest rate floor used for TDSR and MSR computation from 30 September 2022. For bank loans, the medium-term interest rate will be revised from 3.5% to 4% (or 5% for non-residential property purchase loans and mortgage equity withdrawal loans). For HDB loans, it is 3%.
What Is 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. The above-mentioned increase in interest floor rates from 30 September 2022 will apply as well.
HDB Loan Vs Bank Loan: Which Should You Pick? 5 Things to Consider
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.
1. Bank Loans Have a Tighter LTV, but Borrowing Less Also Means More Savings in the Long Run
HDB Housing Loan LTV: Up to 80%
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 September 2022 Singapore property cooling measures saw the LTV for HDB-granted loans being adjusted to 80%, reducing the maximum amount future homebuyers can borrow from HDB.
Still, having the LTV set at 80% means you can borrow more than if you take a bank loan. 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 80% limit is subject to CPF balances. HDB requires each lessee’s CPF OA balance 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 80% 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 5% difference means a larger downpayment is required, and that can put a real dent in your finances, especially if you are tight on cash and/or CPF savings.
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 20% (as opposed to 25%).
With both HDB and bank loans, you can make use of your CPF OA savings, cash, or a mixture of both 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 Loan Downpayment: Minimum 20%, Can Be Fully Paid with CPF OA
Assuming a direct purchase, when you take out an HDB housing loan, the minimum downpayment is 20%, which you can pay off fully with your CPF if you have enough savings in your CPF OA. 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.
Having difficulty visualising how the percentages translate into dollars and cents? Here’s an example.
Let’s Say You Buy a $600,000 HDB Flat
| If you take an HDB loan | If you take a bank loan | |
| How much downpayment to make? | $120,000 (20% of $600,000) | $150,000 (25% of $600,000) |
| How much CPF OA can you use for downpayment? | $120,000 (full amount of the downpayment) | $120,000 (20% downpayment) |
| How much cash upfront do you need? | 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.
You can also use the CPF housing usage calculator to calculate how much of their CPF you can use for your property purchase. We also recommend our affordability calculator to see how much your downpayment, monthly instalment and length of loan tenure are, 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 flat.
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 may offer more potential cost savings if you can afford the upfront cost.
3. HDB Housing Loan Interest Rates Are More Stable
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 OA 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. and has not changed since July 1999. This may be preferable for those who are risk-averse. Given that monthly payments are predictable, taking an HDB loan may enable better planning.
Bank Loan Interest Rates Are More Volatile
Conversely, bank home loan interest rates are more volatile as they move with the market. Taking a bank loan is more suitable for those with a bigger risk appetite and who wish to take advantage of interest rate fluctuations to get a competitive mortgage package, especially when the market is down.
Banks offer 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.
Some banks, like DBS, also offer a hybrid package which lets borrowers have up to half of their mortgage amount to be under a fixed rate package and the rest under a floating rate package, subject to special rates.
Although fixed rates are more stable, they 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 (and it usually goes up!). Also, banks can and sometimes do adjust their fixed rate loan packages.
Currently, the lowest floating rate is 2.70% while the lowest fixed rate is 3.45% (as of 27 October 2022). Although the current bank mortgage rates are higher than HDB’s, they are pegged to the market, which means if rates crash again, you may benefit from greater cost savings. That said, the reverse is also true, so if rates continue to rise, you will pay more.
4. You Can Refinance From an HDB Loan to a Bank Loan, but Not the Other Way Around
If, after a few years, you decide you want to switch from an HDB loan to a bank loan, 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.
For those who have taken a bank loan, you can either reprice a new package from the same bank or refinance with another bank to get a more competitive interest rate.
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 Finance’s mortgage experts 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.
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.
Choosing HDB Loan Vs Bank Loan
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’s stable 2.6% interest rate makes long-term planning easier. Plus, you can pay a smaller downpayment. If, after several years, your finances improve and you want to switch to a bank loan, you are free to do so.
Typically, homebuyers go for a bank loan when they find more competitive interest rates. However, as mentioned, to enjoy this, you must first make sure you can afford the minimum 25% downpayment. But as interest rates rise, it’s important to consider how this will affect your monthly mortgage payments in the long run too.
Ultimately, there is no right or wrong here, just what is best suited for your financial needs.
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