Why I choose Bank loan over HDB loan to pay for my HDB?

Despite the season of hungry ghost festival and the current pandemic, new home sales even reached its highest fourth consecutive month in August.  

Excluding executive condominiums (EC), Urban Redevelopment Authority (URA) data showed that new home sales rose 16.3% month-on-month (m-o-m) to 1,256 units in August from July’s 1,080 units.

Are you also riding on the low interest rates to get your new homes! BTO flats are launching in November, remember to go check it out.

Adapted from HDB website

So now the next step is how do I pay for my flat? 

Here is a quick summary between bank and HDB loans.

Why HDB over bank loans?

Firstly, if you are a young couple, together with your spouse, you don’t have enough savings to fork out cash out down payments.

Under a HDB loan, you only need 10% from downpayment and it can come from CPF fully.

​Since CPF is not liquid at such a young age, repayment using CPF can at least help to reduce your financial burden. 

Secondly, if you are expecting bonuses or striking a lottery so as to clear the debt as soon as possible without incurring early payment charges. There are no additional charges on early repayment whereas for banks, there is. 

Lastly, for those who do not have income stability (self employed or in industries which are threatened by this pandemic), HDB is more lenient when it comes to late payment and they are even providing assistance when necessary.

Why Bank over HDB loans?

Firstly, banks loan rates are significantly lower NOW from this pandemic. This is likely to last for a period of time hence choosing bank loans can save up a huge sum on interest expense. 

Secondly, banks offer flexibility to reprice different loan policies after the lock-in period. Of course, do your calculations, and decide whether it would be worth it to sacrifice on the penalty when you decide to reprice during your lock-in. 

Lastly, for the high income families exceeding the cap for HDB loan which is $14,000 for a family or $21,000 for extended families, HDB loans for resale HDB flats are not available.

Looking into reprice or refinance when you take up bank loans

Refinance: taking out a loan with another institution to pay off your existing loan. Typically, people do this to take advantage of lower interest rates and make savings on their home loan. 

*Do note that there could be legal fees. 

Repricing: allows homeowners to switch to a more competitive loan package within the same institution. The prices range across banks. Do check with your respective banks as some even provide free conversion.

Usually, financial advisers will recommend borrowers to look into repricing before refinancing as one can save the hassle from all the legal and administrative costs such as going through credit assessment again.

The cost to refinance might even outweigh the cost to reprice therefore causing refinance to be less desirable.

Let’s take a look at this example where Timothy is deciding between Bank A and Bank B. Assuming the loan amount is $300,000 and the loan tenure is 25 years.

Personally, I prefer bank loan for now...

Interest rates are low due to the COVID-19 pandemic which is certainly a good time to get a loan.

My belief is that at least for these few years interest rates will not shoot. The economy today might not be as robust hence I will not expect my pay to rise as well.  

Therefore, if you have sufficient cash, go for bank loans instead!

Referring back to the previous table, taking the current bank as HDB. Can you imagine this 1.1% difference in interest rates between HDB and Bank loan can cost almost $50,000 coming from your hard earned money?

It could otherwise be spent on at least a few overseas trips with your family when saved! 

If you don't have the 5% cash downpayment for bank loan

In the case that you do not have enough cash, I'd suggest you can take up an HDB loan first.

Then switch over to a bank loan when you are ready. The good thing about HDB loans is that there is no lock in period and therefore, you can decide to switch to a bank loan any time.

However, do note that this switch is irreversible. Once you are on bank loan you cannot change to HDB loan!

Afterall any savings are still considered savings, if you are already in your few years of paying HDB your housing loan, I suggest that this might be a good time to switch for a better rate. 

Of course, if you are risk averse and prefer to have an ease of mind paying a fixed amount without having to worry about the interest rates in the market for the rest of your tenure then stay with HDB loan.

Lastly, there is a need for additional legal and valuation cost of switching from HDB loan to bank loan. Do take this into consideration when calculating the full benefit of a bank loan. 

Conclusion

I hope that I have provided you with some valuable key points to take note of when considering between the two loans. Do take time to do your calculations and planning.

Don’t rush into any decision just because of their once off benefits. (especially for banks..)  

PS: Have you heard of the term asset progression?

Watch this if you would like to know on numbers from the concept of

"SELL 1 HDB and buy 2 condos!"