Owning a dream home is one of the crucial steps for many people bringing up a family in Singapore. It is within easy reach, thanks to the Housing & Development Board or HDB’s public housing programme, wherein you can buy a build-to-order (BTO) or resale flat with a bank loan.
Buying an HDB home can be a big decision you make financially, for it represents an important turning point for any adult in Singapore. Your financial situation depends on the loan you decide to take. It calls for making an informed choice considering every option available. Picking a bank loan for HDB flats require a good understanding of it.
Choosing between a bank loan and an HDB loan
When compared to an HDB loan, a bank loan generally has fewer restrictions; all that the bank wants to do is perform a credit check. The interest rate of a bank loan fluctuates based on the latest SOR or SIBOR rates. It can be lower or higher than the 2.6 percent interest rate of an HDB loan. It is usually lower.
Bank loans for HDB homes are offered by banks and other financial institutions controlled by the Monetary Authority of Singapore. For instance, DBS offers loans for HDB flats. An HDB concessionary loan, on the other hand, is offered by the Housing & Development Board. You can decide whether to go for a bank loan or an HDB concessionary loan to buy an HDB flat. With a bank, you have the option of borrowing money at a fixed or floating interest rate.
Fixed-rate packages offer a flat rate of interest for a specific period, which is 1-3 years. The interest rate remains the same even if there is a change in the benchmark interest rate. Floating rate packages are pegged to the current SOR (Singapore Swap Offer Rate) or the Fixed Deposit Home Rate (FHR). A floating interest rate changes considering the benchmark rate changes, minimum loan amount, and lock-in period.
With DBS, you can customize your loan by having the best of both floating and fixed-rate packages. For instance, you can have 50% or 40% of the home loan amount under the fixed-rate packages and the remaining 50% or 60% under the floating-rate packages.
- Bank loan interest rates can be lower than HDB loan rates
Homeowners generally believe that bank loans for HDB homes have higher interest rates than HDB concessionary loans. That however is no longer the case. Banks currently offer interest rates that are lower than HDB.
HDB loans are currently offered at an interest rate of 2.6 percent per annum, which is 0.1 percent more than the interest rate on your CPF Ordinary Account), while bank rates typically range from 1.2 – 3 percent per annum.
Though the interest rate on bank loans for HDB is set at 3 percent annually, it typically does not increase that much. It fluctuates according to market conditions and is pegged to SIBOR or FHR. Therefore, bank loans will be a better choice if you want to save money on the total interest rate over the long term.
2. CPF can be used to repay a bank loan
When you take a bank loan for an HDB flat, you can repay it using your CPF funds in your Ordinary Account. You do not have any restrictions on it.
3. Higher cash down payment can be beneficial
You have to put down 25 percent (at least 5% in cash and 20 percent from CPF) of the purchase price of your new HDB home if you plan to finance it with a bank loan. In contrast, the down payment for an HDB concessionary loan is only 10%, and the entire amount can be paid with CPF.
Nevertheless, the larger cash down payment can be advantageous. This is so that you can maintain more money in your CPF Ordinary Account (OA) and receive interest of up to 3.5 percent. And keep in mind how a 1.1% interest savings grow to a substantial amount after 5 years. Further, you will receive a higher interest of 3.5 percent per annum from your CPF-OA.
You can also save on other aspects. For instance, you will have valuation and legal fee subsidies from time to time with bank loans for HDB homes. HDB, however, does not offer this.
4. Bank loans help you earn higher deposit rates
There are schemes from banks offering higher interest rates for deposits to encourage consumers to save and invest more wisely. For instance, the Multiplier Account is one such scheme, allowing you to earn interest up to 4.1% p.a. on your deposits. All you need is to have your salary credited to your DBS/POSB account and use more banking services like the DBS/POSB HDB home loan, credit card spending, and investments.
Moreover, you also have a POSB HomeSaver scheme, which will help you have SGD 700 cash bonus with a POSB Save As You Earn (SAYE) account.
Now, it is up to you to decide whether you should go for a bank loan for HDB flats.