HOUSING MATTERS
HDB Loan vs Bank Loan: Which Is Better?
In Singapore, the cost of residential property can prove to be very expensive and the majority of us are not able to buy the property in a lump sum. Thus, the existence of a mortgage.
There 2 types of mortgages, the HDB Concessionary Loan and a Bank Loan. For you have an option to choose either, this article will help you in understanding the difference and maybe you can decide for yourself, which is a better option.
The Downpayment
As you can see above, you would need to pay a higher downpayment if you were to undertake a Bank Loan. A Bank Loan would be 25% and the HDB Loan is at least 10%.
Furthermore, you can fully pay the payment via your CPF monies if you take a HDB Loan but that would not be the case for a Bank Loan. You would need to pay 5% of the downpayment via cash and the rest payable via CPF.
Thus if you decide to take a Bank Loan, be prepared to fork out some cash from your own pocket or savings.
The Interest Rate
Loans are not free and there is interest that has to be paid. HDB Loan interest is pegged at 2.6% and it is pegged at 0.1% more than the interest that is been given by your CPF Ordinary Account. HDB Loans are at a fixed rate that translates to fixed monthly repayment throughout the loan tenure.
It is an advantage as you can at least foresee and plan out your finances throughout the 25 years. In other words, you would not be caught off guard with a different amount that has been billed to you at the beginning of the month.
Bank Loan, however, has a floating interest rate. That means the monthly loan repayment may not be fixed throughout your tenure. On a good month, you pay a 3-digit figure, on a bad month there maybe a possibility you have to pay a 4-digit figure.
It is somewhat a game of speculation, you are just hoping to see a smaller interest rate. Hence for risk-tolerant individuals, these might be a choice that you want to undertake.
The Loan Tenure
HDB loan tenure is pegged at 25 years. But if you want to stretch your cash flow even further, you may want to opt for a Bank Loan. Bank Loan tenure can be as long as 30 years.
FYI, the longer the tenure, and the higher amount of interest you will be paying. Well, that is assuming that if both are at a fixed interest rate. With a floating interest rate, it is quite difficult how much interest you will be paying in total. You cannot even tell how much is the interest rate the year after.
The Maximum Loan
As you can see, the maximum loan you can take under a HDB loan is 90% of the flat. Which is a huge amount and it is good news for couples who are just starting build up their finances and their lives together.
Without a doubt for a young couple would need money for various things. Wedding, honeymoon, college loan, obligations towards parents and finally to buy a home. Thus, a HDB Loan does help in achieving the goal of owning their first home.
For Bank Loans, the maximum loan you can undertake is 75%. That is a smaller amount compared to the HDB Loan. Not to forget that 5% of the downpayment you have to pay via cash.
Limitation of Use
For a HDB Loan, you are only able to use it only twice. Therefore, if it is your third time purchasing a HDB Flat, you have no choice but to finance it with a Bank Loan.
Be it your first or fifth time buying a home, you can use a Bank Loan at any purchase. In other words, there are no limitations. Well, as long as the bank deems you liable to take on a mortgage, you should not have any problem taking on a loan.
The Fees Involved
-
Early Repayment Fee
Just so happen you just received a huge lump sum of money from work or even inheritance and decided to pay off a huge chunk of your loan, keep in mind there will be an Early Repayment penalty involved if you take a Bank Loan.
A HDB Loan, on the other hand, is more lenient. They do not implement an Early Repayment Fee if you are late with your mortgage payment.
-
Late Repayment Fee
Unfortunately, both will charge you a fee if you are late in paying for your mortgage. But they do, however, charge differently.
HDB Loan will charge you a 7.5% late payment fee per year.
Bank Loan, however, is $50 late payment fee per repayment.
As you can see, you will definitely be paying more late payment fees when taking a Bank Loan.
So, which one is better?
If you are risk-averse, a HDB Loan is definitely a better choice. Stability and consistency are what most people would want and a HDB Loan does offer that.
If you are more risk tolerant and you want to have some chance of saving on some money, then a Bank Loan is something that will fit you. But be prepared to fork out extra if so happen the interest rate is not in your favour.
At the end of the day, you still need to commit to a mortgage and have a roof above your head. As long as you have the privilege to select either, make sure you choose properly and bear with their flaws.
That is the end of the article and hope the information is useful. Do share it with your friends and families. Till next time.
Disclaimer
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
