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.

  • Filipino, Vietnamese troops play games on Spratly island

    MANILA, Philippines (AP) — Filipino and Vietnamese troops played football and tug-of-war Wednesday to foster camaraderie at a Philippine-held island in the South China Sea, where territorial rifts have escalated following China's island-building activities. …

  • Philippine, Vietnamese troops play soccer and sing on disputed island

    By Manuel Mogato MANILA (Reuters) - Vietnamese and Philippine troops played soccer and sang karaoke on a South China Sea island on Wednesday in a sign of the growing security ties between the two Southeast Asian nations most at odds with Beijing over the contested waterway. Cooperation has blossomed between Hanoi and Manila since they shelved decades of enmity over their competing claims in the Spratly archipelago to try to counter China, whose creation of artificial islands in the region …

  • SE Asia Stocks - Fall on renewed U.S. rate hike concerns

    BANGKOK, May 27 (Reuters) - Southeast Asian stock markets tumbled on Wednesday as investors resumed selling on expectations of an interest rate hike in the U.S. sooner rather than later, derailing Philippine ... …

  • Phl, US defense chiefs to meet on sea dispute
    Phl, US defense chiefs to meet on sea dispute

    As US aircraft carrier USS Ronald Regan began its journey to Asian waters amid China’s power flexing in the region, Defense Secretary Voltaire Gazmin would try to hear directly from his US counterpart how far America is willing to go to aid its long-time ally against China’s threatening moves in disputed waters. Gazmin flew to Hawaii last Monday to attend ceremonies for the turnover of leadership of the United States Pacific Command (USPACOM) from Admiral Samuel Locklear to Admiral Harry …

  • Water in Angat Dam falls below critical level
    Water in Angat Dam falls below critical level

    The water level of Angat Dam in Bulacan yesterday fell below the 180-meter critical level for irrigation, the Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) said. PAGASA said the dam’s water level further dropped to 179.98 meters as of 6 a.m. yesterday from 180.2 meters on Monday. The priority is the domestic consumption in Metro Manila, according to PAGASA. …

  • PCSO gets P3-B fund for medical aid
    PCSO gets P3-B fund for medical aid

    The Philippine Charity Sweepstakes Office (PCSO) reported yesterday that an estimated P3-billion charity fund has been allocated by Congress to the agency to provide medical assistance to indigent patients and also give funds to other government offices including the Philippine Drug Enforcement Agency (PDEA) and the Crop Insurance Program. …

  • Image of Asia: Tearing down squatters' homes near Manila
    Image of Asia: Tearing down squatters' homes near Manila

    In this photo by Bullit Marquez, a demolition crew begins to tear down a squatters' community at suburban Caloocan city, north of Manila, Philippines. Population growth and the lack of economic opportunities in rural areas have driven millions of Filipinos into the squatters' colonies that dot the sprawling metropolitan area in and around Manila. Most of the land they occupy is privately owned, and clearing the dwellings often results in violence. The landowner had offered about $1,344 in …

  • SE Asia Stocks - Mostly down; Thai shares near 2-week low

    BANGKOK, May 26 (Reuters) - Most sharemarkets in Southeast Asia fell on Tuesday with the Thai index ending at a near two-week low and the Philippines touching a near four-week low after trade data while ... …

POLL

Should Aquino be held accountable over the Mamasapano operations?

Loading...
Poll Choice Options