Blind Following The Herd in Going for HDB Loan?

Just yesterday I was meeting a buyer who is intending to make purchase of her first property. The buyer said she had done Housing Loan Eligibility (HLE) for HDB Loan and she didn't even consider bank loan at all. I asked her the reason.

These are her exact words - "It is because many of my friends said HDB Loan has a stable fixed rate and HDB won't take back the house if we fail to make installment payment." Within this statement contains 2 myths and misconceptions that most buyers have causing them to make the wrong move in their mode of financing.

If I'm Eligible For Both HDB Loan & Bank Loan ...

This is one of the conversational topics that I often stumble across with my clients while doing discussion for next property purchase. Let's take a look at the main differences between HDB Loan and Bank Loan:

[Summary for HDB Loan]

• Current interest rate 2.6%

• Applicable to HDB flats

• At least 1 buyer must be Singaporean

• Certain monthly income ceiling to be fulfilled

• Does not own any private residence (Singapore or overseas)

• Does not take more than two previous HDB loans

• Does not dispose any private residential property within 30 months

• Up to 90% loan quantum, 10% balance is payable with CPF / Cash

• CPF in Ordinary Account could be wiped out to give lower HDB Loan quantum (option to keep $20000 CPF in OA only)

• If take 2nd HDB loan directly after 1st HDB loan, part of cash proceed will be used to reduce loan quantum of 2nd HDB loan

[Summary for Bank Loan]

• Current interest rate 1.8%-2% (average)

• No restriction on nationality (calculation differs across country)

• No income ceiling to be fulfilled

• Loan quantum depends on number of home loan on hand (refer to LTV chart below)

• Does not need to dispose any private residential property to be eligible

• Up to 75% loan quantum, 5% compulsory cash, 20% balance is payable with CPF / Cash

• Flexibility in utilizing CPF in Ordinary Account to reduce Bank Loan quantum

• If take Bank Loan next after HDB Loan / Bank Loan, no cash proceed will be used to reduce Bank Loan quantum

I am going to break down into 4 different pointers which are crucial for you to make the informed decision because this will impact you financially in the short term and long term. It could potentially affect the amount of sales proceed you will get when you sell your property.

Consideration 1: Risk Appetite

Five to fifteen years ago, bank interest rates were in the range from 3% to 6% and fluctuating frequently. Whereas for HDB loan, it has been staying constant in the range of 2.6% (+0.1% higher than CPF Interest Rate on Ordinary Account). Therefore, those who are risk averse and prefer something more certain, will opt for HDB loan which is 2.6% throughout the loan tenure.

However, today it makes sense for borrowers to go for bank loan because in the last two to three years, bank rate has stayed comfortably below HDB Loan's interest rate. Bank loan's interest rates today are hovering around 1.8% to 2%, even those fixed 5-year rates are in the range of 2% or even lower. However, borrowers have to keep themselves updated with the latest bank loan package after the bank package's lock-in period (can be either 2 / 3 / 5 years). The lock-in period is good to keep the interest rate stable and more predictable for borrowers. This could potentially provide another option (other than choosing HDB Loan) to those borrowers who are risk averse.

Consideration 2: Flexibility in Loan Redemption

HDB Loan can allow borrowers to fully pay off the outstanding loan amount or fully redeem balance loan anytime. If you borrowed HDB loan today, tomorrow you get a windfall such as striking lottery, you can fully pay off the HDB loan with lump sum of cash. Whereas for bank loan, if borrowers redeem the loan within the lock-in period of 1 to 3 years, there would be a penalty range from 1% to 1.5% of the balance loan amount. One point to note even though there is penalty for full bank loan redemption, borrowers can still make partial bank loan prepayment without any penalty.

Borrowers just need to consider: what is the probability for one to have windfall / strike lottery? What is the possibility that one will sell off the property within the lock-in period? If you are buying HDB property, you will need to fulfill the Minimum Occupation Period (MOP), so it is a certain that you will not be selling the property within the 5 years. Whereas for purchasing private property, you will incur Seller Stamp Duty (SSD) which ranges from 4% to 12% if you sell within the first 3 years. Most owners will not want to sell within the first 3 years to incur the heavy SSD tax, so bank loan lock-in period of 2 to 3 years will not do any harm to borrowers.

Consideration 3: Cash Proceed After Sale of HDB

If you are owner of MOP fulfilled property or having property within 10 years, chances are you will have positive cash proceed. If you are having HDB loan at the moment and you are intending to get HDB loan again for your purchase of bigger HDB flat, do take note that CPF will be wiped out again to reduce 2nd HDB loan amount. Not only that, you can only keep the greater of S$25,000 or 50% of the cash proceeds (including the cash deposit received). From there, HDB will take into account the remaining part of the cash proceeds in determining the quantum of the second HDB loan.

What does it mean to you as the HDB seller? It means that you have lesser cash proceed for purposes such as renovation for new house, pay for education fee, buy new car etc. It is a good intention by HDB so that borrowers do not over-leverage since there is huge cash proceed from the sale of HDB. If you have planned to make good use of the sales proceed, taking second HDB Loan for your next housing might not be a wise move. However, Bank Loan does not have such requirement at all.

Consideration 4: Loan Quantum

HDB Loan allows borrower to borrow an amount less than S$100,000. However if borrowers intend to take bank loan, S$100,000 is the bare minimum loan quantum.

HDB Loan is one of the best things that only Singaporean can enjoy, however there are only in total 2 HDB Loans one can take in the lifetime. If you have the plan to upgrade or downgrade in the future which only require less than S$100,000 loan quantum, all the more you should save your chances of using HDB loan for the future.

If you have utilised both HDB loan chances, bank loan is the only way to go. With the property price today, it is quite rare to borrow less than S$100,000. If you are property owners with property within 10 years or have fulfilled MOP requirement, you should be selling it away and leveraging on bank loan for your next purchase. With the low interest rate environment in Singapore (as compared to ~6% in Malaysia, ~8% in Cambodia etc), you should be using Other People's Money (OPM) to grow wealth by tapping on fund instead of using cash / CPF to pay fully.

I have highlighted the 4 considerations you should take note when you are deciding which to go for. It is pretty obvious Bank Loan has gained popularity nowadays. Nevertheless, you have to weigh the pros and cons together with your risk appetite. Remember not to follow what others might have said about HDB Loan and Bank Loan.

Convinced But Not Sure Which Bank Loan To Choose?

If you have a plan in mind but not sure if it works well – do share with me or let me know.

I will do my best to assist you to make sure you look at your plan from multiple angles and ensure you have a very clear picture on what’s going on.

Drop me a HI! in whatsapp and share with me your top most concern in the property upgrading journey.

JJ Wong is the founder of MOPUpgraders.sg and has been a Property Wealth Planner in the real estate market for the past 6 years. He has helped many clients achieve their aspirations with the right financial planning and sound timeline planning. He is the man behind upgrading case studies of those who are holding on property under 10 years.