HDB loan vs bank loan: Which is better for you in 2023?

CPF

By Guest Contributor • 07 Jan 2023

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Just bought a HDB flat and deciding between a HDB loan vs a bank loan? We share how we will decide whether a HDB loan or bank loan is more suitable for our financial needs.

In this article

If you are deciding between a HDB loan or bank loan, we'd like to first congratulate you on buying your HDB flat!

For first-timers buying a HDB flat, it must be a scary experience making such a big financial decision and choosing between a HDB loan and a bank loan.

After all, we are looking at a loan of a few hundred thousand dollars, and we want to make sure we do not end up paying more for our housing loan.

Hence, we will use a little bit of math to show you how we will decide between a HDB loan vs a bank loan.

What is the difference between a HDB loan vs a bank loan?

If you're new to mortgages, here’s a quick summary of the differences between a HDB loan and a bank loan.

	HDB loan	Bank loan
Interest rate	2.6% (0.1% above CPF OA interest rate)	3.80 - 4.60% (fixed) SORA + 1.00% (floating)
Max amount of loan you can borrow (LTV)	80%	75%
Down payment	20% either in cash or CPF	25%, of which 5% in cash and 20% in cash or CPF
Early repayment	No penalty	1.5% penalty
Late payment penalty	7.5% fees per annum	$80 late fees per repayment
Source: HDB and various bank websites as of May 2023

What are the advantages of HDB loan vs Bank loan?

#1 - HDB loans have a lower interest rate than bank loans currently

If you have been doing grocery shopping or buying your cai png, you would have realised that prices have increased.

This, my friends, is because of inflation. To curb inflation, central banks need to increase interest rates to bring demand down.

Unfortunately, the inflation rate has not been coming down as fast as they wanted, and the only option left is for them to increase interest rates again and again.

Let me explain why this is important to us.

Bank loans on floating interest rates are pegged to something called SORA, or Singapore Overnight Rate Average.

The higher the SORA, the higher the bank loan’s interest rate.

If you draw the link, it would be:

Higher inflation rate → Higher US interest rate → Higher SORA → Higher bank loan interest rate

Not convinced yet? Let me show you what the numbers say.

In less than 6 months, the SORA increased from 0.77% to 3.03% in January 2023. Assuming banks continue to apply a premium of 1% to 1.5% on top of SORA, the bank loan’s interest rate would be higher than 2.6%.

3 month SORA table (2022) — Source: POSB

3-month SORA table (2023) — Source: POSB

#2 - A HDB loan requires less downpayment

A HDB loan will require you to come up with a downpayment of 20%, which can be paid either in cash or using your CPF savings.

However, a HDB loan will require you to come up with a downpayment of 25%, of which 5% must be paid in cash, and the remaining in either cash or using your CPF funds.

#3 - A HDB loan offers more flexibility

You can repay back the HDB loan early without incurring a penalty. However, there may be a 1.5% penalty if you make an early repayment for your bank loan.

Also, you can switch from a HDB loan to a bank loan at any time, but you cannot switch from a bank loan to an HDB loan.

# 4 - A HDB loan offers more sources of potential support

In the event that you have difficulties paying your monthly installments, HDB may offer various financial assistance measures to help you.

This might include:

Allowing you to pay the housing loan arrears in instalments
Extending the housing loan term and lowering the monthly instalment amount
Deferring or reducing monthly loan instalment payments for 6 months
Getting your working family members to be joint owners to help with the loan payments

You can find out more about these Financial Assistance Measures here.

What are the advantages of a bank loan compared to a HDB loan?

#1 - You may not qualify for a HDB loan

There are various criteria that need to be met when taking a HDB loan. If you do not meet the requirements for a HDB loan, you will have to take a bank loan for your HDB flat purchase.

Citizenship	At least 1 applicant is a Singapore Citizen
Household status	The core applicant and core occupier have not previously taken 2 or more housing loans from HDB
Intended flat purchase	Seniors aged 55 and above: you are not applying for a 2-room Flexi flat on short lease*. Singles aged 35 and above: you are buying either a 2-room Flexi flat on 99 year-lease from HDB in non-mature estates; or a 5-room or smaller resale flat
Monthly household income ceiling	Your average gross monthly household income must not exceed: $14,000 for families $21,000 for extended families $7,000 for singles buying under the Single Singapore Citizen (SSC) Scheme
Ownership/ interest in property in Singapore or overseas other than HDB flat	All persons listed in the application: Must not own or have an interest in any local or overseas private residential property; Have not disposed of any private residential property^ in the last 30 months before the application for an HFE letter. Must not own or have an interest in more than 1 local or overseas non-residential private property* at and within 30 months prior to the HFE letter application.
Remaining lease of the flat	The loan amount will depend on the extent the remaining lease can cover the youngest applicant to the age of 95 and above.
Source: HDB

The full list of requirements can be found here.

#2 - HDB loan may be more expensive IF CPF OA interest rate goes up

Based on the Fed's projections of interest rates, interest rates on bank loans will likely remain high.

In any case, we can switch to a bank loan at any point in time if the Bank’s interest rate really does become cheaper.

Note that we are assuming that the CPF OA interest rate remains unchanged at 2.5%. We shared earlier on why the CPF OA rate has stayed at this level despite rising interest rates.

Should I switch to a HDB loan if I am using a bank loan now?

You can always refinance with another bank that offers a lower interest rate.

The mechanism for bank loans can be more complicated with fixed rate and floating rate packages.

You can refer to Beansprout's article on choosing between a fixed and floating rate package.

Final verdict: Is taking a HDB loan or bank loan better?

With the lower interest rate offered currently, a HDB loan would appear to be more attractive compared to a bank loan for your HDB flat purchase.

This will lower your mortgage payments and help to ease your financial burden.

In addition, it offers you the flexibility of switching to a bank loan should there be changes in interest rates.

However, for home buyers who are not eligible for a HDB loan, then we can consider a bank loan instead.

Find our how to apply for a bank loan for your HDB flat purchase using our step-by-step guide.

Learn more about what else you would need to do for your HDB BTO flat purchase.