You are among the lucky ones balloted to select a BTO flat, now comes the important part – HDB loan vs bank loan: which one is more suitable for you?
Both HDB housing loan and bank loan have their pros and cons, so, in today’s article, we will look at the key differences between the two.
Loan Packages And Interest Rates
HDB housing loan has a fixed interest rate of 2.6% p.a. (until they change the CPF-Ordinary Account rate).
This concessionary 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.
It is worthwhile to note that the HDB interest rate has remained unchanged since 1999.
If you borrow from a bank, you can choose between their fixed or floating rate packages.
There are two types of loans that you can opt for when taking a home loan: Fixed Interest Rates or Floating Interest Rates.
A fixed interest rate is usually priced at a premium as the rate will remain unchanged over a specific period. With a fixed-rate loan, you’ll know for sure what you will be paying for monthly instalments every month.
On the other hand, floating interest rate changes according to the benchmark rates. Floating rates are slightly lower than fixed rates and when the interest rate changes, your monthly instalment may change.
Loan-to-value (LTV) limits
The loan-to-value (LTV) limit determines the maximum amount an individual can borrow from a financial institution (FI) for a housing loan.
LTV refers to the loan amount as a percentage of the property’s value.
For HDB housing loans, the LTV is up to 90% of the purchase price of BTO flats and the lower of either the resale price or market value for resale flats.
For a bank loan, the LTV is limited to up to 75% of the purchase price.
That would mean you have to fork out 15% more as a downpayment. The additional cash upfront of 15% is a big obstacle for those with a tight cash flow. However, as you are borrowing 75% instead of 90%, you will end up paying less interest and a smaller monthly instalment.
Refinancing options
If you opt for a bank loan, it is important to note that you will not be able to switch to an HDB housing loan later.
After the lock-in period, should you want to refinance the loan, you will have to do it with another bank or the financial institution (FI).
However, if your first housing loan is from HDB, you can refinance it with any bank/FI.
Penalties
The HDB is usually more flexible when it comes to late payments or early redemption.
You will only need to pay the registration fee of $38.30 and conveyancing fees of between $23.50 to $82.35, depending on the flat type, for the Total Discharge of Mortgage (TDM).
The full list of the conveyancing fee (inclusive of GST) for each flat type are:
1-room flat: $23.50
2-room flat: $35.30
3-room flat: $47.05
4-room flat: $58.85
5-room flat: $70.60
Executive flat/ maisonette: $82.35
If you are facing financial difficulties, there is a Financial Assistance Measures (FAM) in place for flat owners who face difficulties paying the monthly instalments of their HDB housing loan.
If you find yourself in financial hardship, these options may be available to you:
Paying the housing loan arrears by instalments within a reasonable period.
Lowering the monthly instalment amount by extending the housing loan term up to the maximum repayment period, subject to your eligibility and the 65-year-old age ceiling.
Deferring or reducing monthly loan instalments for 6 months. This is to help flat owners facing short term difficulties in servicing their loan instalments.
Inclusion of working family members as joint owners to help pay for the flat loan instalment/arrears.
For more information on the FAM, you can visit any HDB Branch, or call the toll-free Branch Service Line at 1800-225-5432.
For bank loans, there is usually a penalty of 1.5% to 1.75% for early repayment within the lock-in period. The late payment fees differ from bank to bank, and it is best to check with each bank before deciding on the package.
Total Debt Servicing Ratio (TDSR) / Mortgage Servicing Ratio (MSR)
For both HDB and Bank Loans, the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) restrictions will apply. As housing loans are usually large and long-term liabilities for most individuals and households.
TDSR limits ensure that borrowers are not over-leveraged for property purchases. This is also to encourage financial prudence among borrowers and prevent market speculation.
TDSR refers to the portion of a borrower’s gross monthly income that goes towards repaying the monthly debt obligations, including the loan being applied for.
A borrower's TDSR should be less than or equal to 60% of your monthly income.
MSR is applicable only for HDB flat types including Executive Condominiums (ECs).
This refers to the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan being applied for.
Currently, the MSR is capped at 30% of a borrower's and/or joint borrower’s gross monthly income.
Summary
So to recap, HDB housing loans have a higher interest rate of 2.6%, but it is less volatile. HDB loan also allows you to borrow up to 90% of the price or value of the property, meaning you pay less as the down payment.
Bank loans have lower interest rates but they are subject to the benchmark rate, but you can only borrow up to 75% of the price/value of the property, which means you have to pay more for the down payment.
With both HDB and bank loans, you can make use of your CPF Ordinary Account (OA) savings to service the downpayment.
You can switch from an HDB loan to a bank loan but you are not allowed to switch from a bank loan to an HDB housing loan.
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