HDB Or Bank Loans: Which One Should You Choose?

Beyond making a deposit for their dream home, many homeowners will have to source for a loan that breaks up further payment over a block of years. We weigh in on both options as means to finance a Singapore home.

Taking up a housing loan can be a daunting prospect, requiring much research and weighing of the pros and cons. Given housing prices in the city-state, a decision made today will have an impact on how finances are channelled over the few decades ahead.

There are two main options: Going with the Housing and Development Board (HDB) or turning to loans offered by banks.

  • The HDB track

This is the safer option by far. The concessionary interest rate for HDB loans is pegged at 0.1 percent above the current Central Provision Fund (CPF) Ordinary Account interest rate – that hasn’t been susceptible to wild fluctuations.

Up to the end of March, the interest rate for a HDB loan stands at 2.6 per cent per annum, the same as the previous quarter. Even if this rate increases in the future, home buyers will stick to paying the rate they committed to.

Buyers who opt for this will be able to make the initial down payment solely from funds in their CPF account. There are no early repayment penalties if someone on an HDB loan manages to pay off their debt sooner than expected.

Even so, at least one buyer has to be a Singapore citizen to be eligible for the loan. Buyers must not own or have sold off any private residential property in the 30 months before an application. They must also meet an income ceiling that stands at $12,000 for families, $18,000 for extended families and $6,000 for singles.

  • Bank for your buck

If you choose to go with a bank’s home loan, interest rates today are significantly lower than what buyers agree to with HDB. These are typically linked to the Singapore interbank offered rate (Sibor).

According to a report on The Business Times, the three-month Sibor stands at 1.24270 per cent, down from 1.2540 per cent on Jan 19. Even so, these interest rates are prone to fluctuation and those on home loans pay the rate of the day.

These loans are available to those with private property, but are tagged with an early repayment penalty should successful applicants want to settle loans ahead of the agreed time period.

While the current low rates are tempting, a bank home loan comes with the risk of paying more in the long run. Packages with fixed short-term interest rates tend to be much higher and not worth the trouble.

An interesting compromise could be bank mortgages that offer some flexibility. For instance, under the SIBORFlex plan at United Overseas Bank, borrowers are tied to the 12-month Sibor rate for the first year, and the three-month Sibor rate for the following years.

Should interest rates be on an upward trend, they have the option of extending the 12-month Sibor rate for longer, according to Mr Dennis Khoo, the bank’s Head of Personal Financial Services for Singapore.

  • Making the right call

With two extensive options available, home buyers should study the possibilities before making a commitment.

The current picture of Sibor rates is a rosy one. Still, in the light of constantly evolving markets, taking a HDB loan could be the less stressful option for some.