Advantages of HDB Loans vs. Bank Loans Explained (a shortened version)

Before January 1, 2003, people who buy an HDB (Housing Development Board) flat have to finance it with an HDB Concessional Rate Loan or an HDB market rate loan. But HDB’s market-rate loan has since been replaced by home mortgages from financial institutions, which are published by the Monetary Authority of Singapore.

HDB Concessional Rate Loan

Compared to a mortgage loan from a financial institution, an HDB loan has more stringent eligibility requirements. The following covers most of them.

Eligibility Criteria:

• Only for HDB floors (resale or purchase direct from HDB)
• At least one buyer must be a citizen of Singapore
• Must have gross monthly income not to exceed $10,000 (or $15,000 for extended families)
• For DBSS flat, the income limit is $8,000 (or $10,000 for extended families)
• For applicants under the Single Singapore Citizen (SSC) scheme, the income limit is $5,000
• Must not own any private residence (in Singapore or abroad), including HUDC and executive condominium
• Must not have sold a private residential property within 30 months and taken an HDB loan before
• Must not have previously taken out an HDB loan within 30 months
• Must not have taken more than two previous HDB loans
• You must not own any more street vendors/market stalls or commercial/industrial property (except if you operate the business yourself, have no other source of income, and only own a street vendor/market stall or commercial/industrial property)

As of July 2013, HDB loans will not be granted for apartments with less than 20 years of rent. In addition, for apartments with a lease between 20 and 59 years, the approval of the loan and the tenure will be subject to certain conditions.

Given the many restrictions on an HDB loan, why do Singaporeans still want to take one? We delve deeper into the advantages of this loan in the following sections.

1. Highest withdrawal limit of the CPF (Central Provident Fund)

For financing through bank loans, the withdrawal limit of the CPF Ordinary Account is up to 100% of the valuation limit (VL), which is the lower of the purchase price or the valuation at the time of purchase. If the loan is still outstanding when this limit is exceeded, the Home Withdrawal Limit can be increased to 120% NAV provided that half (total) of the Current Minimum Sum is set aside for borrowers under age 55 (age 55 and over). ). This housing withdrawal limit varies with the date of purchase of the flat, for purchases from 2008 it is 120%.

However, with a concessional loan from HDB, you can enjoy a higher withdrawal limit.

For the direct purchase of HDB, there is no limit to the savings in the Ordinary Account that you can use.

In the case of resale HDB flats, there is no limit to the savings in the Ordinary Account that you can use, once you have allocated half of the current Minimum Sum.

But as of July 2013, for flats with leases between 30 and 59 years, the use of the CPF fund is only allowed if the remaining rent covers the buyer up to at least 80 years. For such floors, the withdrawal limit will be calculated according to the following formula:

Withdrawal Limit

= (The remaining rent of the apartment or property when the youngest owner is 55 years old / The rent of the apartment or property at the time of purchase) x NAV

For example, at the time of purchase the buyer is 38 years old and the lease is 40 years. When the buyer turns 55, the remaining lease will be 23 years. That’s why

Withdrawal limit = 23/ 40 x NAV

Table 1 further illustrates what VL is.

Table 1: NAV

Plan A

Purchase price (S$) = 400,000

Valuation (S$) = 350,000

Net Asset Value (USD) = 350,000

Floor B

Purchase price (S$) = 370,000

Valuation (S$) = 420,000

Net Asset Value (USD) = 370,000

For apartments with less than 30 years of lease, the use of the CPF fund is prohibited. In other words, buyers will hand over cash for a down payment, monthly loan payment, stamp duty, and other miscellaneous fees.

2. No cash component required for down payment

A key advantage of an HDB loan is that you do not have to pay any part of the down payment in cash. You are allowed to use the balance of your CPF (Central Prevent Fund) Ordinary Account to pay it in full.

While with a bank loan, you will have to pay at least 5% of the Valuation Limit (LV) in cash. If the loan tenure exceeds 30 years or extends beyond 65 years, the minimum amount increases to 10%.

3. Highest loan amount

For the first HDB Concessional Rate Loan you are taking out, the loan amount is as high as 90% NAV. In contrast, for bank loans, the amount is capped at 80% LTV (loan-to-value ratio). It is reduced to 60% if the tenure of the loan exceeds 30 years or extends beyond 65 years.

The new regulations, which came into effect on January 12, 2013, dictate that the mortgage service ratio (MSR) for private loans must not exceed 30% of the borrower’s gross monthly income and 35% for HDB loans.

Effectively, this can translate to a lower loan amount for a bank loan compared to an HDB loan.

For example, for a 30-year loan with an amount of 80% for an HDB apartment of S$800,000, at an interest rate of 1.5% per annum, the monthly repayment amount will be S$1,932.67. To be eligible for a

• HDB loan: Monthly gross income ≥ S$ 5,521.92
• Private loan: Monthly gross income ≥ S$6,442.24

Therefore, if your income is below S$6,442.24, you will not be eligible for an 80% LTV private loan. If you extend the tenure of the loan, current rules require that you can only take up to 60% LTV.

Therefore, an HDB loan will allow for a larger loan amount.

4. HDB is more forgiving

As a government agency whose primary goals are to provide quality affordable housing and encourage home ownership, HDB tends to be more tolerant of delinquent borrowers.

But for a loan from a financial institution, you are always obliged to pay the stipulated amount monthly, even if you have suffered a salary cut.

In addition, HDB generally grants the deferment of the payment of the monthly installment if it has had financial difficulties. Banks, on the other hand, will probably be on your heels if you defer payment even for a day!

5. No penalty for partial or full repayment of the loan

It is noteworthy that HDB imposes zero penalties for partial or full payment of your loan.

However, most mortgages from financial institutions come with a lock-in period (also known as a commitment period) usually 3-5 years. During this period, any refund above the previously agreed amount will result in a penalty, usually a maximum of 1.5% of the refund amount. Financial institutions benefit from the interest incurred on the loan, any partial or full repayment of the loan means a loss in interest income. Therefore, the penalty helps offset this loss.

6. Interest rate stability

Since the review of the interest rate of an HDB loan is done quarterly along with the changes in the CPF rate, which has been the same for more than 10 years. The interest rate has also remained stagnant. An HDB loan therefore offers relatively more stability than even a fixed-rate mortgage, whose rate is only fixed for 3-5 years. This is not to say that there have been no fluctuations in HDB’s interest rates. For example, in the 1990s, rates showed greater volatility.