HDB loan a better option than bank loan for BTO and Resale HDB buyers in 2022

Home owners who chose bank loans over HDB loans have been enjoying a good run for the longest time (since 2009 in fact). It doesn’t matter whether they have elected floating or fixed home rate because it was still cheaper than a HDB housing loan. Those who chose a HDB loan were often ridiculed for leaving money on the table. Well, there is a saying that all good things have to come to an end and the music has clearly stopped on cheap financing. News of banks increasing the interest rates on their home mortgage packages have dominated headlines the past couple of weeks. This turn in tide means that using a HDB loan is a better option than a bank loan for BTO and resale HDB buyers in Year 2022. Here are 4 compelling reasons why the traditional dilemma of HDB or bank loan has become less of a conundrum today.

1. HDB Housing Loan offers lower interest rate

HDB housing loan levies a concessionary interest rate that is pegged at 0.1% above the prevailing CPF Ordinary Account (OA) interest rate. Since the prevailing CPF OA interest rate is 2.5%, the HDB concessionary interest rate is currently at 2.6%. Note that this is subject to adjustment 4 times a year.

On the other hand, fixed rate mortgage loan packages offered by the local banks range from 2.75% to 3.08% as shown in Diagram 1. (as at 3 Jul 2022)

Simply by comparing the fixed rate home loan packages offered by the banks, HDB housing loan is clearly a cheaper source of financing for aspiring HDB owners. What about mortgage solutions that are floating?

As shown in Diagram 2, the floating rate is pegged to either the 3-month or 1-month compounded SORA. A margin ranging from 0.8% to 1% is then applied to it to obtain the all-in interest rate. For instance, the 1-month compounded SORA rate on 1 July published on MAS website is 1.03%. If you add in OCBC’s margin, the interest rate to be applied to that month’s mortgage is 2.01%. While this is cheaper than HDB concessionary interest rate of 2.6% today, this might not hold true by the end of the year. Here’s why.

Just look at the trend of 1-month compounded SORA since the beginning of 2022 as shown in Diagram 3. If this trend doesn’t scare/convince you, here’s a look at the forward curve of OIS SORA.

As shown in Diagram 4, the projected SGD OIS SORA with 1-month tenure in 6 months’ time is 2.43%. Although this is not direct substitute for 3-month compounded SORA (which is backward-looking), Diagram 4 would show you the trend of which interbank overnight unsecured lending is heading towards. If 3-month SORA reaches 2.4% by the end of the year, the all-in rate on your floating home loan will be in the region of 3.2%-3.4% after adding in the bank’s margin. Ouch. Therefore, whether you are comparing a fixed-rate or a floating-rate bank loan against the HDB housing loan, the latter clearly wins hands down, at least for those who have to make the decision in Yr 2022.

If all these jargon sounds confusing to you, I suggest you take a pause and refer to this article which explains the difference between SORA, SIBOR and SOR. I break down all the jargon in this article with the sole aim of equipping you with more knowledge before you commit to a new loan/refinance your existing loan. Finally, you can always shop around for the most competitive home mortgage on PropertyGuru’s Smart Refi. This allows you to make a direct and more accurate comparison and I highly recommend completing this exercise as part of your decision making process.

2) A lower downpayment is required under a HDB Housing Loan

Not only is a HDB housing loan cheaper in interest rate, it also requires a smaller downpayment from the HDB flat buyer. Diagram 5 shows the difference in Loan-to-Value (‘LTV’) and payment at different milestones between a HDB housing loan and a bank loan.

A higher LTV limit at 85% under the HDB Housing Loan means that less cash/CPF outlay is required as downpayment. This entire 15% can be paid via CPF OA, which means that cash can be used to fund renovation works and the purchase of furniture. In comparison, the loan ceiling for a bank loan is only 75%, which effectively translates to a required downpayment of 25%. More importantly, one-fifth of the downpayment must be paid in cold hard cash.

For couples with liquidity constraints, even a bank loan with lower floating interest rate (at least still the case for now) may not offer the best solution to their cash needs. Exhausting all your cash for the downpayment may be not financially prudent as a pool of emergency funds should always be set aside in interest-yielding instruments such as Singapore Savings Bond. On the other hand, the higher LTV not only makes home ownership more accessible, it also enhances the flexibility of a HDB Loan further.

Furthermore, if a HDB home owner satisfies the criteria for the Staggered Downpayment Scheme, only a 10% downpayment is required instead of 15%. This means that the remaining 90% balance can be financed by a HDB loan, subject to the assessment outcome stated in the Home Loan Eligibility (‘HLE’) Letter. This translates to a potential loan to value (LTV) of 90%.

3) No early repayment penalty for HDB Loan

One of the attractiveness of a HDB housing loan lies in its flexibility. A HDB loan borrower will not be penalized for choosing to repay his HDB loan early while the same cannot be said for most bank loans. It is often the case that one may choose to use his or her year-end bonuses to make a partial capital repayment.  An early partial principal repayment, which starts from a minimum of $5,000, may reduce your loan tenure from X years to (X-Y) years or leave you with a lower monthly instalment but with the same expiration date.

Most importantly, you will not be required to pay the remaining outstanding interest committed initially (i.e. for the entire duration) under a HDB home loan. The interest payable schedule will be based on the remaining HDB balance instead. Therefore, the incentive to make an early repayment is to save on the total interest expense paid on the housing mortgage. This incentive is viable because there is no early repayment penalty; which would have otherwise eaten into any potential interest expense savings.

4) HDB Loan Borrowers Still Can Switch To A Bank Loan When Conditions Are Right

Having a case of buyer’s remorse? Not to worry as HDB housing loan borrowers can always convert to a bank loan especially when the interest rate environment is in their favour. What I mean is that benchmark interest rates fluctuate from time to time, therefore there could be periods where they might decrease to the extent that a bank loan becomes cheaper than a HDB loan. Since a lock-in period for HDB loan is not applicable, the decision to switch can take place anytime and will not attract a penalty.

This was exactly what Heartland Boy did back in 2020 when he refinanced from a HDB loan to a DBS fixed-rate loan. He took advantage of the low interest-rate environment and successfully applied for a mortgage package that locked in a 5-year interest rate fixed at 1.5% p.a. Therefore, it always pays to monitor and keep a lookout for refinancing options to ensure that you are getting the best rates possible.

However, the reverse is not true. A home owner who opted for a bank loan cannot change mind and switch to a HDB Loan during the mortgage period. In the eyes of the government, it is deemed that the home owner has already passed up on the chance to use a HDB concessionary loan.

Conclusion

For those who are due to collect the keys to your dream HDB flat, the classical dilemma of financing it with HDB housing loan or a bank loan is not such a difficult decision anymore. This is because a HDB home loan is going to be cheaper than a bank loan in the short-term and this hasn’t been the case at least for the past decade. For those who are eligible for a HDB housing loan, you have a chance to save on your mortgage payments.

*Note that this article contains referral links that goes to maintain the sustainability of this blog