Bank Loan vs. HDB Loan: Which is Better?

Choosing financing for your home is like a game of “Rathers”. You know, where everyone tackles hard questions like “Would you rather be whipped naked down Orchard Road, or rely on the MRT for transport?” But unlike a game of Rathers, home loan discussions are seldom accompanied by laughter and beer (unless you’re awesome). No, picking a home loan is a serious issue. To save you the brain drain, this article contrasts the ole’ HDB loan with a fancy bank loan:

 

HDB Flats

I got the best loan I could qualify for. Now pitch the tent under that tree.

 

What’s This HDB Loan Thing?

HDB concessionary loans are a provision for Singaporeans. The interest rate for a HDB loan is 0.1% above the current CPF rate. As of now (2012), that’s 2.6%.

While banks just check your credit, HDB loans have certain restrictions:

  • It applies to HDB flats (Duh)
  • At least one buyer must be a Singapore citizen
  • Buyers’ monthly income must not exceed $10,000 (or $15,000 for extended families)
  • Buyers must not own any private residence (in Singapore or overseas)
  • Buyers must not have taken more than two previous HDB loans
  • Buyers have not disposed of private residential property within 30 months before the loan application

These are just the most pertinent restrictions. There are others, for people who own and operate commercial properties.

 

Huge stack of books

That's the intro. The FAQ is taking up the third and fourth floor.

 

How Does It Compare to a Bank Loan?

Depending on the current SIBOR / SOR rates, a bank loan can be better or worse than a HDB loan. Likewise, there are security issues that may appeal to some buyers. In general, a HDB loan is:

  1. More forgiving than a bank loan
  2. Higher on the interest rate
  3. Less intrusive to your cash flow
  4. More Helpful for the down payment
  5. No early repayment penalties

 

X-ray of broken leg

Compound interest vs. compound fracture: At least the fracture doesn't have a 30 year tenure

 

1. More Forgiving Than a Bank Loan

This is the biggest appeal of a HDB loan. Bankers have as much compassion as your average rock; fail on your loan repayment, and the frequency of your showers will start to depend on the weather. HDB, on the other hand, will do its best to defer your repayments.

Also, HDB caps your monthly repayments at 40% of your income. A bank loan has no such restriction: The amount you owe is the amount they expect, regardless of your circumstances.

 

Train tracks

Paid late? Took a bank loan? Maybe you should check the train tracks fro him.

 

2. Higher on the interest rate

As mentioned, the HDB loan rate is 2.6%, and seldom changes. Bank rates are more variable; they’re based on current SIBOR and SOR rates, which are usually cheaper. Bank interest rates typically range between 1.14% – 1.3% (as of May 2012).

The downside is that the bank’s rates are variable. You’re guaranteed the same interest rate for three to five years at best (fixed loan package). Beyond that, you’re at the mercy of the market. Also, banks have a huge range of different loan packages; If you don’t understand how to pick the best one, a HDB loan is a simpler choice.

Otherwise, visit home loan sites like SmartLoans.sg, which will display the interest rates of all local banks. From there, it might be a case of just picking the cheapest.

 

Empty pockets

We're providing for your poverty situation. Our loan may also be causing it, but we're providing for it.

 

3. Less Intrusive to Your Cash Flow

If you need consistency in repayments, HDB loans win hands down. The HDB loan is based on the CPF, which changes as often as Edison Chen makes the news for good behaviour. The best a bank can do is to give you a fixed rate package, which lasts just three to five years.

So if you have a tight budget, pick the HDB loan. You’ll know exactly how much to set aside each month. As an added plus, HDB loans come with fewer clauses. You don’t need to worry about pre-payment penalties (see point 5), and deferred (late) payments are easier to negotiate.

 

Whispaw graph

"I won't be joining you. It's April, I can only afford to eat on alternate months."

 

4. More Helpful For the Down Payment

If you get a bank loan, at least 5% of the initial 20% down payment has to be in cash. You’d best prepare for an amount like $15,000, for even moderately sized property.

Before giving your patronage to the neighbourhood loan shark, consider a HDB loan. You can use your CPF money (if you have enough) to cover the entire down payment. If you’re just cash strapped for that initial 20%, access to your CPF could give you a wider range of property options.

 

Fancy classic car

Uh oh. Dear, when you said to go ahead with the down payment, did you mean on our HOUSE?

 

5. No Early Repayment Penalties

If you attempt to pay off a bank loan early, there’s a hefty penalty. The bank was counting on making money off you via the interest rate, and the minions of Satan the bank never gives up what they’re owed.

HDB is more relaxed. If you get a sudden windfall, you can rush your repayment. Remember, the faster you clear your debt, the less interest you end up paying. You might even plan for this; if you’re expecting a large cash infusion in 10 years, for example, you can get a HDB loan and plan to settle it quick.

With banks, attempting to pay early lands you a 1.5% prepayment penalty.

 

Upside down car and mob

Here's your loan money back, with penalty. And here's the car loan back too, with the car.

 

Conclusion

A HDB loan is better if you’re risk averse, or if there’s a chance you can pay off the loan early. It’s also useful if your career is just getting started: The down payment on your house is lower, and you have more chances with missed repayments.

But if you understand the housing market well, and you know how to refinance, the bank loan is ultimately cheaper.

Image Credits:
Unhindered by Talent, frankenstoen, stuartpilbrow, Francesco Schwarz, endiaferon

Did you use a HDB loan or a bank loan? Comment and tell us your reasons!Digg Digg

Get more Personal Finance tips and tricks on www.MoneySmart.sg

Click to Compare Singapore Home Loans, Car Insurance and Credit Cards on our other sites.



More From MoneySmart
Loading...

Editor’s note:Yahoo Philippines encourages responsible comments that add dimension to the discussion. No bashing or hate speech, please. You can express your opinion without slamming others or making derogatory remarks.

  • The Race to Global Greatness - YGP6
    The Race to Global Greatness - YGP6

    Yamaha Motor Philippines (YMPH) recently held the first leg of the Yamaha Grand Prix 6 at the SM Sta. Rosa compound in Laguna. The racing categories for this year are the following: Automatic Inter-Club RaceUnderbone Inter-Club Race115 Superstock ATVega Force i SuperstockSniper 150 Open UB130 Open UBMio 125 MX i …

  • Volkswagen opens new showroom along Quezon AvenueVolkswagen opened a new showroom along Quezon Avenue, …
    Volkswagen opens new showroom along Quezon AvenueVolkswagen opened a new showroom along Quezon Avenue, …

    Volkswagen opened a new showroom along Quezon Avenue, which is now the automotive row of Northern Metro Manila.At the Innauguration was Chief Operating Adviser Klaus Schadewald, Branch Manager Bob Anthony Palanca, Volkswagen Philippines: President and CEO John Philip Orbeta and General Manager Nemesio Solomon, Jr. This new showroom has the latest Volkswagen Interactive Showroom applications. ... …

  • Nissan launches its “Virtual to Reality” GT Academy here in the Philippines
    Nissan launches its “Virtual to Reality” GT Academy here in the Philippines

    The Filipino Gran Turismo gamer just became eligible to become a Pro Race Car driver as Nissan Philippines Inc. launched its GT Academy here in the Philippines. The object is to find the best Grand Turismo players in both the online qualification process and participating in the live events after which they’ll compete with each other in National Finals to see who gets to attend the 3 month Race camp.  The winner gets to stay in the UK near Silverstone and will take part in UK national and club …

  • Osmeña wants electricity exempted from VAT
    Osmeña wants electricity exempted from VAT

    Sen. Sergio Osmeña III wants electricity to be exempted from value added tax under a proposed measure that will amend the National Internal Revenue Code of 1997 and the Reformed VAT Law. He said the move aims to ease the burden of the public in paying high electricity rates in the country. “VAT on electricity is another burden on the already over-taxed shoulders of our people, especially those whose incomes are barely enough to cover their basic needs. Osmeña, chairman of the Senate …

  • No lotto draws starting tomorrow until Easter Sunday
    No lotto draws starting tomorrow until Easter Sunday

    No lotto tickets will be sold and no lotto draws made starting tomorrow, Maundy Thursday, up to Easter Sunday in observance of Holy Week. In a statement, Jose Ferdinand Rojas II, acting Philippine Charity Sweepstakes Office (PCSO) chairman and general manager, said the selling of lotto tickets and lotto draws will resume on April 6,  Monday. “We thank all Lotto players for your trust and confidence in the PCSO games, and we count on your continued support of our efforts to raise funds for …

  • Quake rocks C. Visayas
    Quake rocks C. Visayas

    A magnitude-3.2 earthquake rocked parts of Central Visayas yesterday. State seismologists said the quake was an aftershock of a powerful tremor that hit the region in 2013. The Philippine Institute of Volcanology and Seismology (Phivolcs) said the quake occurred at 7:54 a.m. Its epicenter was located 10 kilometers  southeast of Buenavista, Bohol. Phivolcs director Renato Solidum said the quake was an aftershock of the magnitude-7.2 earthquake that hit Bohol on Oct. 15, 2013. …

  • Super howler nears Phl
    Super howler nears Phl

    A typhoon that has devastated islands in the Pacific is forecast to become a category 5 monster howler as it barrels toward the Philippines this week. The Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) said Maysak will be named Chedeng when it enters the Philippine area of responsibility tonight or tomorrow morning. In an interview, PAGASA weather forecaster Gener Quitlong said the forecast track of Maysak may still change depending on the movement of …

  • Philips Gold finally shines

    Philips Gold made 11 service aces on its way to beating Mane ‘N Tail, 25-19, 27-25, 25-16, for its first victory in the Philippine Super Liga (PSL) All-Filipino Coinference Monday night at The Arena in San Juan.Former College of St. Benilde standout Rossan Fajardo had six aces as part of her 10-point output as the Lady Slammers finally barged into the win column after losing their first two matches.Ex-National University star Myla Pablo led Philips Gold with 14 points highlighted by 12 kills, …

POLL

Should Aquino be held accountable over the Mamasapano operations?

Loading...
Poll Choice Options