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Hi Mr Propwise,
Need your expert advice on financing a resale flat, which we are planning to buy at $650,000.
At this point where interest rates for bank loans are at rock bottom, does it still make sense to be taking a HDB loan to finance our first home?
What are the pros and cons of taking a HDB loan as compared to a bank loan?
The interest rate differential seems to imply that taking a bank loan would save us few hundred dollars each month.
The HDB provides housing loans at a concessionary interest rate (currently 2.6%) to eligible flat buyers. The HDB loan has several advantages over a bank loan:
1) Your interest rate is more stable. The interest rate is fixed for a long period of time (as it’s pegged at 0.1% above the CPF interest rate, which has been at 2.5% for many years). With a bank loan, you will be subject to interest rate fluctuations after a length of time (up to 3 years if you picked a fixed rate loan).
2) HDB loans can also be less cash intensive. You can finance up to 90% of the valuation of your home with an HDB loan while banks can only finance up to 80% (or 70% if you have one or more outstanding mortgage loans). Also if you take the HDB loan, you won’t have to come up with the 5% downpayment in cash for your flat.
3) HDB loans have no lock-in period, and no penalty for early redemption. You may make a partial repayment at any time with no penalty. Contrast this with banks that may have a lock-in period on their loans and penalty fees (typically around 1%) for partial or full repayment.
4) HDB is likely to be “kinder” to you in times of financial difficulty. If you lose your job and default on your loan, the banks may repossess your flat if the loan agreement provides for it, whereas the HDB is likely to be less harsh. For the HDB loan, you can apply to defer payment for a length of time if you are facing financial problems.
Given the above, why would you consider a bank loan? The main reason is that due to the current low interest rate environment, the interest rate for bank loans can be lower, at least for the initial few years. So in the short term, you will be able to save some money with the bank loan, but over the typical 30 year length of a mortgage, it will depend on where interest rates go.
Note that as recently as 2006 the SIBOR was above 3.5%, so if you are looking at a SIBOR+ package your mortgage rate could be 4-5% if interest rates spike back to that level. My view is that interest rates are likely to stay low for the next year or so as U.S. rates are kept low to stimulate the economy, but you never know.
So if you want to minimize your mortgage payments in the near term, you can consider the bank loan to save on your interest payments.
However if you want the security of a stable interest rate, flexibility in terms of repayments, lower up front requirement for cash, and a “kinder” debtor if you experience financial difficulty, the HDB concessionary rate loan is a good choice if you can qualify for it. Also note that once you take a bank loan, the HDB is probably not going to grant you an HDB loan in the future.
Hope this has been helpful and good luck on your home purchase!
To wisdom and beyond,