Bank loan vs HDB loan: Which is the better option?

For most of us, it is impossible to buy our homes without a loan. Housing loan is considered one of the safest loan for lenders. Hence, the interest rates are relatively lower as compared to other loans such as a motor vehicle loan.

For Singaporeans, not only we have the options to choose loans from the various banks, HDB also have have the ability to provide housing loans.

In this article we will explore the difference between the loans offered by the 2 different institutions.

Interest rate

Most homeowners will look at the interest rate. This is the cost of borrowing money from the bank. The higher interest rate means the higher cost of borrowing.

HDB interest rate is pegged at 0.1% above the prevailing CPF Ordinary Account (OA) interest rate, and may be adjusted in January, April, July, and October, in line with CPF interest rate revisions. The current HDB interest rate is 2.6% and it hasn’t changed for decades.

For bank loans, rates differ across banks. Most banks use the floating rate, which varies from one year to other, and is pegged to Singapore Interbank Offered Rates( SIBOR). The current interest rate is about 2%.

Downpayment

For HDB loans, you can borrow up to 90% of the valuation of the property. What’s left is 10% for the deposit, which can be paid by CPF.

For bank loan, on the other hand, you can borrow up to 75% of the valuation of the property. That means you will need to fork out 25% for the initial deposit. Out of the 25% deposit, at least 5% must be in CPF.

Repayment Penalty

For those who are planning to pay their loans early, there is no early repayment fee for HDB loan.

With banks, attempting to pay early lands you a 1.5% prepayment penalty.

Late payment penalty

For HDB, from my experience, HDB tends to be more understanding on the late payment of monthly instalments. Many of those who experienced a financial downfall can write in to HDB to defer their repayments and HDB will do their best to help.

For banks, they are less forgiving. A month or 2 of late payments will incur additional fees. Worst case scenario, the bank can force you to sell the house or force payments through legal means, which can lead to bankruptcy.

Verdict

HDB loans should be your first choice if you are just starting out in your career or if HDB is your first property.

For more seasoned home buyers, bank loans are generally cheaper. Just be careful with the fees and the terms and conditions set by the banks. Banks tend to be less forgiving than HDB as they are a private entity.