HDB Loan vs Bank Loan – Which Should You Choose?

If you are considering purchasing a home in Singapore, you have two options: HDB or private properties. For those buying a HDB flat, which represents about 80-90% of the market, deciding on whether to get a HDB concessionary loan or a bank loan can feel like being between a rock and a hard place—both have their pros and cons. This article will cover some factors you will need to consider before deciding on which type of loan to go for.

Eligibility

As the name suggests, you can only take out a HDB concessionary loan if you are buying a HDB flat.

The quickest way to find out if you are eligible to apply for a HDB flat is by applying for the HDB Flat Eligibity (HFE) letter. You will first be asked to do a preliminary HFE check before you can apply for a valid HFE letter.

Besides buying a HDB flat, there are other eligibility conditions that you must be aware of. These include:

If don’t qualify for these conditions, you cannot even apply for a HDB loan even if you are buying a HDB flat. (Do note that executive condominiums owners are only allowed to take up a bank loan.) If you qualify, there are other factors worth considering, which we discuss below.

Down Payment

The price of private condominiums and public housing has seen a closing gap in recent years, and it is no longer uncommon to hear of HDB flats hitting the S$1 million mark. In 2023 alone, an estimated 460 HDB resale flats were sold for S$1 million or more, 25% more than the 369 public housing flats that crossed the million-dollar mark in the preceding year.

However, if HDB flats are getting more expensive and private properties supposedly have greater potential for price appreciation, why are Singaporeans still going for public housing without the facilities and perks of living in a condominium?

One of the main reason is that the difference in size of down payment that one has to fork out for a condominium and HDB. When you take up a bank loan, for example, the bank imposes a limit of maximum Loan to Value (LTV) ratio of 80%, which means you’d need to make a down payment that is 20% of the full price. For a HDB loan, on the other hand, you can get up to a maximum LTV of 90% so that you only have to pay 10% of a property’s price out of your own pocket.

Another difference is that for those who take up a HDB loan, you can even use your CPF money to pay down the 10% down payment, which means you don’t really need much cash upfront. On the other hand, if you’re purchasing a private condominium or taking a bank loan for your HDB flat, at least 5% of your 20% downpayment needs to be paid for in cash.

Thus, for those Singaporeans who do not have a lot of cash available, taking up a HDB loan might help to relieve some of that cashflow problem that they face when making a sizable down payment.

HDB Interest Rates Deemed To Be More Stable

A HDB loan’s rate is considered very stable because it hasn’t changed much in the last few decades. The concessionary interest rate is pegged at 0.1% above the prevailing CPF Ordinary Account (OA) interest rate. Currently, this interest rate is at 2.6%, which is lower than the current average bank home loan rates of around 3.7% to 5.5%. Bank interest rates have greater variability than HDB rates since bank home loans are usually pegged to rates like SIBOR and SOR that fluctuate on a daily basis. Because of this, more borrowers might choose to take up the HDB loan because they will know exactly how much they need to pay every month despite the fact that bank home rates can go lower than HDB loan rates.

A way to get around this with a bank loan is that you can choose a fixed rate loan, or get a loan where you can lock in the rate for a few years before you refinance later.

Bank Loans Can Be Cheaper

You can find an assortment of home loans provided by banks, including fixed and variable rate loans, and those pegged to the SIBOR, SOR or even fixed deposit rate. According to our research, while home loan rates provided by bank currently range between 3-5%, it has been as low as 1-2% before interest rates were raised, which means you can pay at least 0.6% less interest compared to a HDB concessionary loan with a bank loan.

If you apply this 0.6% to a loan of S$500,000 paid over 25 years, your interest difference can be more than S$40,000. So depending on the prevailing interest rate at the time you’re about to take up a loan, do weigh your options carefully as the cost difference can be significant.

No Prepayment Penalties For HDB Loan

In order to reduce the total amount of interest paid, some borrowers may want to make a lump-sum payment during their mortgage tenure. Sadly, this is often penalised by banks with a prepayment penalty as they would have factored in the entire cost of borrowing from the start. These penalties can cost about 1.5% to 1.75% of the loan amount, which may negate whatever interest savings you get.

For a HDB loan, however, there is no such penalty if you want to make lump sum prepayments. So if you are likely to refinance your home loan or prepay a considerable amount of your home loan in the next few years, then you may want to opt for a HDB loan.

Conclusion

A HDB loan could be the ideal solution for someone who is more risk-averse and prefers to pay less down payment. But for a more savvy borrower who focuses more on reducing the cost of borrowing, getting a bank loan could help to save on substantial interest payments in the long term.

Looking for a suitable home loan? Check out our roundup of the best home loans in Singapore today!

Read More:

• Should You Get a Fixed Home Loan or a Floating Home Loan?
• 3 Reasons Why You Might Need Mortgage Insurance
• Pros and Cons of Paying Off Your Mortgage Early
• What’s the Average Cost of Housing in Singapore?
• How Much Do You Need To Earn Per Month To Buy A Condo in Singapore?

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