Why Choosing an HDB Home Loan is Still Your Best Option (Even with Higher Interest Rates)

By Nicholas Hoe|Published 28 Apr 2021 5 minutes

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Most Singaporeans buy a HDB flat to live in it, that’s a fact. More facts: 80% of Singaporean residents live in a HDB unit, and 90% of those residents own the flats they live in. Given the statistics, it’s highly likely that your next housing purchase – regardless of whether it’s your first or otherwise – is likely to be a HDB flat. This purchase automatically provides you with the avenue of financing your purchase with the HDB’s concessionary loan instead of taking one from the bank.

We’ve previously covered the basics of the HDB loan and how it differs from home loans provided by banks in HDB Loan vs Bank Loan: Which Should You Get?. The key takeaway is that bank loans currently offer lower interest rates and so project to be cheaper, but there’s more. Now, we’ll dive a little deeper and examine why you should take advantage of the HDB loan before exploring the home loan market.

Downpayment Flexibility, Increased Liquidity

The Loan-to-Value (LTV) limit for the HDB loan of 90% is higher than bank loans, which top out at 75%. This means that the HDB loan requires a minimum of 10% downpayment, compared with home loans from banks requiring a minimum of 25% downpayment. Given that 15% of a property’s price can be a significant amount, this difference in downpayment could mean either greater savings with which you could then spend on home renovation or other big-ticket items, or you might even be able to upgrade and a more expensive unit. This difference in minimum initial downpayment can be especially decisive for those of you who are young homeowners, who might have only recently started your careers and therefore not have much in the way of savings yet.

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Another point to consider is that you can choose to pay off the downpayment for the HDB loan entirely with your CPF OA funds. That means you have the option to not spend any cash at all for the initial 10% of your home purchase, providing you with great liquidity to prepare for the impending financial commitment of owning your first home. In contrast, bank loans require at least 5% of the minimum 25% to be paid in cash, before you’re allowed to use your CPF OA savings to cover the remainder 20% of the minimum 25% downpayment.

As you can see, the combination of a lower minimum downpayment together with the ability to pay it entirely with your CPF OA funds means that the HDB loan allows you to stay much more liquid at the start of your loan term without requiring you to sink in any cash to secure the loan and your home purchase.

Loan Term Flexibility

The HDB doesn’t require you to lock in your loan tenure when it is granted. This means that you can choose to start with the maximum loan amount with the longest duration, thus committing to the lowest monthly repayment amount, and then later opting to pay more when your financial circumstances have improved. Similar to the downpayment flexibility mentioned above, this allows you to maintain greater liquidity and to do more with your money.

Furthermore, this lack of a fixed loan period also means that you can choose to switch over to a bank loan. While the downpayment flexibility and other factors may make HDB loans more enticing initially, further down the line your financial situation might have changed so that bank loans would be more favourable. You can switch your HDB loan to a bank loan with minimal fuss, though bear in mind that this is a one-way conversion; a home loan taken from a bank cannot be converted to the HDB concessionary loan.

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This also means that if you decide to sell your unit before the loan tenure is up, you can simply use the proceeds of your sale to offset the remaining loan without any additional cost or hassle. Banks, on the other hand, will charge you a pre-payment fee if you sell your HDB and cut short your loan if it’s within the lock-in period.

Stable Interest Rate

While it’s true that the HDB loan’s interest rate of 2.6% p.a. is currently quite a bit higher than bank rates, keep in mind that your home loan is likely going to stretch across many years and decades, and that the same interest rate climate won’t last forever.

For example, if you had bought your home in 2001 and took a bank loan at the rate of 3-month Singapore Interbank Offered Rate (SIBOR) plus 0.85%, your interest rate scheme would’ve looked like this:

Year 3-month SIBOR Bank loan rate (3-month SIBOR + 0.85%)
2001 2.75% 3.60%
2002 1.19% 2.04%
2003 0.81% 1.66%
2004 0.75% 1.60%
2005 1.50% 2.35%
2006 3.25% 4.10%
2007 3.44% 4.29%
2008 2.38% 3.23%
2009 1.00% 1.85%
2010 0.69% 1.54%
2011 0.44% 1.29%
2012 0.38% 1.23%
2013 0.38% 1.23%
2014 0.40% 1.25%
2015 0.58% 0.58%
2016 1.19% 2.04%
2017 0.97% 1.82%
2018 1.50% 2.35%
2019 1.89% 2.74%
2020 1.77% 2.62%
20-Year Average 2.38%

If you had taken the HDB loan through the same period? The interest rate would have been the same 2.6% throughout. Sounds low, but notice that there was great fluctuation between rates, which went as low as 1.23% and peaked at 4.29%, and with a four-year period where the average was almost 3.5%. While the HDB’s interest rates aren’t exactly fixed, they’re pegged to the CPF OA’s rate, which has proven to be much more stable than the SIBOR or SORA rates that banks in Singapore use.

HDB Contra Facility

The HDB Contra Facility is one of the less widely known advantages. This contra facility lets you sell your existing HDB flat and buy another one using the sale proceeds and refunded CPF cash. Basically, it’s an extra loan to make up the difference between your former and new homes, if there’s any.

Of course, after having considered all these reasons that have been provided, you might still feel that it’s in your best interest to get financing from a bank, which can be a perfectly reasonable conclusion! Everyone’s circumstances differ: you may find yourself able to put down enough of a downpayment that lower interest rates is your primary consideration, or you don’t mind committing long term to a particular bank without altering the terms of your loan agreement

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