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Should I take an HDB loan or bank loan to buy my first home? Here are 3 factors that you need to consider

Should I take an HDB loan or bank loan to buy my first home? Here are 3 factors that you need to consider

Last Updated on by Tree of Wealth

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It’s a big decision to buy your first home. You’ve been planning for what feels like forever, and now you’re finally ready to take the plunge and buy that house you’ve been dreaming of. But the first step is to pay for your flat purchase. In Singapore, locals may choose to get a housing loan from Housing Development Board (HDB) or a bank loan from a financial institution (FI).

If you are wondering whether to take an HDB loan or bank loan to buy your first home, the answer is “it depends.” Here are three things you need to consider when thinking about which type of loan to take:

1. Consider your housing type

First, consider if you are buying a private property or an HDB flat. Private properties in Singapore are usually condominium apartments and landed properties such as terrace homes and bungalows.

The housing type matters as an HDB housing loan is only available for Singaporeans looking to purchase a new HDB Built to Order(BTO) flat or a resale HDB flat. You can loan up to 80% (from 30 September onwards) of the amount with an HDB housing loan and use the balance in your CPF account to pay the remaining sum for the new BTO flat or a resale HDB flat. Use the nifty CPF Housing usage calculator to find out how much you can use for your home purchase.

However, if you choose to buy a condominium apartment, or even an executive condominium (EC), you must take up a housing loan from a regulated financial institute. This includes banks such as DBS or OCBC or financial institutions such as Hong Leong Finance. The loan amount differs for private property.

So HDB loan or a bank loan? Read the following two factors before considering if you want to take up a private housing loan for an HDB flat.

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2. Consider your available funds for downpayment

As of 30 September 2022 onwards, due to new cooling measures, you will need to make a downpayment of at least 20% of the purchase price if you purchase an HDB flat. You can pay this amount using your CPF Ordinary Account (OA) savings, with cash or a combination of both. The HDB loan conditions are that you will have to use all available savings in your OA for the purchase before a housing loan is granted for the remaining amount. Ho​​wever, you can choose to leave up to $20,000 in your OA as an emergency buffer to cover monthly instalments.

Amongst HDB housing types, the price differs based on whether you’re buying a new BTO or a resale. It also varies according to size and location. HDB BTO flats are usually significantly more affordable than resale flats. For example, a quick search reveals that a four-room BTO Sengkang flat can go as low as $400,000, but a four-room resale flat in the same neighbourhood can cost around $850,000. So if you calculate your downpayment, it can make a lot of difference depending on your choice.

Those who opt for a bank loan to pay for their HDB flat will have to pay 20% of the purchase price as a downpayment when they sign the Agreement for Lease. After that, you pay the balance of 5% of the purchase amount using cash when you collect your keys. Only the remaining 15% can be paid using CPF OA, or you can use cash.

For those who purchase private property and must loan from a financial institute, the maximum loan amount that the Monetary Authority of Singapore (MAS) has set is 75% of the property value or purchase price (whichever is lower). You can use your CPF OA to pay up to 20% for the downpayment and to make loan repayments.

Therefore, in choosing an HDB loan or a bank loan, consider how much cash upfront you have or in your CPF OA for the down payment.

Interested to learn more?

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3. Consider interest rates and loan tenure

After you get your keys to your new home, you’ll be pretty thrilled. But remember, housing loan repayments are also subject to interest rates.

A housing loan from HDB has a concessionary interest rate. This interest rate is pegged at 0.10% above the prevailing CPF Ordinary Account (OA) interest rate. Currently, it stands at 2.6%. However, the CPF board does adjust quarterly, in line with CPF interest rate revisions.

On the other hand, the interest rates of bank loans fluctuate according to market conditions. You will also have to choose between fixed or floating interest rates, options that we will explore in this article (link to next article). Therefore, depending on the circumstances, it might be lower or higher than HDB housing loan interest rates. You can also enjoy better interest rates if you can successfully negotiate with your bank when you refinance your loan years down the road. Furthermore, consider shortening your loan tenure when planning your financial goals to save on paying interest rates.

Can I switch from an HDB loan to a bank loan?

The answer is yes, you can! For HDB loans, there is no lock-in period. That means there is no penalty if you wish to pay off your loans early. This also means you can refinance your loan with a bank anytime if you want to tap on lower interest rates. However, note that once you decide to refinance your HDB loan with a bank, you cannot switch back to an HDB loan.

If you take a housing loan from a bank, most banks will have a lock-in period of two or three years. Therefore, if you would like to repay your loan before the tenure ends or refinance with another bank within the lock-in period, there is usually a penalty. Again, you will not be able to finance your home with an HDB housing loan once you decide to use a bank loan for your mortgage.

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Final thoughts about HDB versus bank loans:

Overall, the type of loan you choose will also depend on the type of property and your financial situation. However, if you decide to use CPF savings as most Singaporeans do, it’s important to remember that your CPF savings are also meant for retirement. Therefore, keep in mind your current financial situation and future needs!

It’s hard to decide between an HDB loan vs bank loan, especially if you are buying an HDB flat since you can choose between both options. There are pros and cons to using either avenues. To buy your first home with peace of mind without breaking the bank, contact our friendly and experienced FAs for more advice.

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Protect Your Loans

For mortgages, be it HDB loans or bank loans, it is important to note that Term Insurances are a way to protect your finances in the event of death, total permanent disability (TPD) as well as critical illnesses. This is to prevent the loan from becoming a debt if one party were to meet a death or TPD situation.

Contact us below in finding the most competitive and best coverage on mortgage term insurance.

We will guide you along on the financial protection while you buy your first home so that you can plan wisely for your future needs as well.

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