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HDB Loan or Bank Loan?

For the past couple of years (2010 to 2012), the HDB (Housing Development Board) Concessionary Home Loan Rate of 2.6% will certainly seem high compared to home loans offered by retail mortgage lenders. However, there are compelling reasons why most people should still take up the HDB Concessionary Home Loan if they have the option.

Even though the HDB Concessionary Home Loan rate is currently higher than rates offered by banks and financial institutions, this is not always the case. HDB's 2.6% has remained the same for more than 10 years, underlying the key reason why most should take up their home loans with HDB – stability. The current low interest rate environment is not here to stay. Interest rates historically average around 3.5% to 4%. If you opt to borrow from a bank and when interest rates go up, you will be paying more than what HDB is charging.

Currently, HDB also offers a higher LTV of 90% compared to 80% 75% (updated July 2018) offered by retail lenders. If you have enough CPF money, you do not have to fork out any cash (cash is loosely used here to refer to non CPF money) for the downpayment. For bank loans, a downpayment of 5% of the purchase price in cash is mandatory.

On the other hand, there are 4 situations where you should consider not taking up a HDB Concessionary Home Loan.

Full Repayment BETWEEN 3 TO 6 YEARS

As of March 2012, if you are likely to sell your HDB flat or fully repay your home loan in around 3 to 6 years, it is wise to borrow from a bank. The United States Federal Reserve has pledged to keep interest rates low till at least late 2013 (Update: The US Federal Reserve pledged in September 2012 to keep interest rates low till at least mid 2015), and since Singapore's interest rate environment move in tandem with the United States, we can safely assume that the banks' interest rate is going to be lower than HDB's for at least 2 years. Even when rates start going up in the 3rd year, it is unlikely that the rate will exceed 2.6%. For the 4th and 5th years, even if interest rate goes up by 0.5% - 0.7% each year, you would have still enjoyed significant savings over the 5 years period. For those who are averse to interest rate fluctuations, you can opt for 5 years fixed rate packages that basically guarantees for 5 years, a lower interest rate than the HDB Concessionary Home Loan Rate.

Lots of CPF (Central Provident Fund) Money

If you have lots of CPF money in your Ordinary Account (OA), you should give some thought to taking up a bank loan as all money in your OA has to be paid towards the property at most $20,000 can be retained in your OA while the remaining OA funds has to be paid towards the property (updated Aug 2018) when you take up a loan with HDB. When the money is withdrawn from your OA, it will no longer yield the 2.5% interest rate that the Singapore Government is giving. Furthermore, upon sale of the property, you will have to repay the money into your OA together with the accrued interest over the corresponding period. You not only lose out from the loss of interest for having withdrawn money from your OA, you also have to pay from your own sales proceeds, interest which the Singapore Government would have been paying for you if the money was kept in the OA. A way to side-step wiping out your CPF without taking up a bank loan is to invest your OA money before purchasing a property. Do bear in mind, however, that there are risks when you invest and also transaction costs involved.

Sold First HDB Flat and Bought Another

When you buy a HDB flat after selling your first one, you have to either use 50% of your cash proceeds from the sale, or the cash proceeds subtracted by $25,000, whichever is lower, towards the purchase. This sum, together with your entire CPF balance, will have to be ploughed into the second HDB flat. When you take up a bank loan, you do not have to abide by this regulation, freeing up the cash for whatever use you wish.

Temporarily Cash-strapped

This rarely happens but for some people who are temporarily short of cash, such that they do not have enough funds to make the cash payments that are required within 10 days from the HDB First Appointment, proceeding with a bank loan allows one to defer the cash payment till the Completion (Second) Appointment.

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