HDB loan or bank loan? Reasons to choose a BANK loan

Following up on the article comparing HDB loan with bank loan and explaining the reasons why a HDB loan is better, I like to visit the reasons why some HDB owners take up a bank loan and why a bank loan is better than HDB loan.



Eligibility for a HDB concessionary loan
Those who are not eligible have to apply for a bank loan for their HDB. In this situation, it's clear-cut. The only comparison you should make is which bank loan is more suitable for you. You should use the New Home Loan Calculator that will compute the interest payable and monthly installments of all HDB home loans provided by banks in Singapore. For those who are eligible for a HDB loan, please read on for points to consider why a HDB bank loan might be better.



Loan quantum
The rising prices of property in Singapore means HDB flats (BTO, DBSS or resale) are at record prices. With the cooling measures implemented by the Singapore government, the COV portion is decreasing and seemed to be stabilizing. However, this only mean lesser cash upfront as COV can only be paid by cash. The valuation of HDB flats are higher than before, which means a higher loan quantum is required if one takes up a 80% loan from the bank. A bigger loan quantum means the higher-end of the legal subsidy can be obtained, and more savings can be achieved as long as bank loan interest rates are lower than HDB interest rate of 2.6%.



Legal subsidy
Whether you are taking up a HDB bank loan for a new home or refinance, lawyer fees are payable by you. Do not worry as banks will offer legal subsidy, about 0.4% or up to $2,500, whichever is lower. Typical lawyer fees is about $2,500. So a loan of $500,000 may attract a subsidy of $2,000 and the home buyer will pay the balance of $500.



Low interest rates
Interest rate in today's environment is low and in fact, at all-time low. Is the direction only upwards or will remain low? Though your guess is good as mine, we can take cue from the past and what the world is doing. US Federal Reserve seemed to intend to keep interest rates low till 2014. The various HDB bank loans are based on SIBOR, SOR or bank board rates on top of a spread. These bank loan rates are around 1% for floating while fixed rates is higher at 1.4% to 2%.



Risk appetite
This is a question that many home buyers failed to ask themselves first. Yes they want low and constant interest rates. No they don't want changes and volatility in interest rates. However, these two points seldom agree with each other. The perceived fixed rate of 2.6% for HDB concessionary loan is not exactly correct. It is not fixed. It is just that HDB has not revised and pegged it differently since day one.



Time horizon
Buying a BTO, DBSS, SERS or resale HDB flat comes with a Minimum Occupation Period which is currently between 5 to 7 years. So regardless of your future upgrading plans, you must serviced the mortgage for 5 to 7 years at least, before you can sell and redeem fully the loan. This will be an important factor in reasoning why a bank loan might be better than a HDB loan.



Savings from a HDB bank loan over a HDB loan
Scenario 1
Mr Tan and family prefers fixed packages and they actually think the HDB loan of 2.6% will provide them a peace of mind. They will be purchasing a flat and intend to borrow $400,000. Mr Tan aspire to upgrade the HDB flat to a private apartment after 5 years. They wonder what the packages are available in the market. They use the Refinance Loan Calculator and noticed the 5 year fixed package with rates of 1.8% fixed for the first 5 years and SIBOR + 1.15% thereafter. Based on 35 years of loan tenure, the monthly savings are $167 and $10,000 over 5 years! This is a significant savings despite some outlay after the legal subsidy of a bank loan. He asked the banker to compute the numbers if the nett interest rate increases to 4% hypothetically from year 6 onwards. It would have taken him another 4 years till year 9, before the $10,000 savings disappears. So his considerations are:

the fixed $10,000 savings over 5 years,
a smaller outstanding loan amount after 5 years,
the opportunity to refinance or reprice after 5 years without incurring legal clawback,
his upgrading plans after the MOP expires,
the likelihood of 4% interest rate from year 6 onwards,
another 4 years till year 9 before the $10,000 savings disappears.


He decided that this HDB bank loan is suitable for his family.

For more scenarios, read why some choose HDB Bank Loan over a HDB Loan.