Explaining the Advantages of HDB Loans versus Bank Loans
Before 1 January 2003, people buying a HDB (Housing Development Board) flat have to finance it either with a HDB Concessionary Rate Loan or a HDB market rate loan. But since then the HDB market rate loan was replaced by home mortgage from financing institutions, which are gazetted by the Monetary Authority of Singapore.
HDB Concessionary Rate Loan
Compared to a home loan from a financing institution, a HDB loan has more stringent eligibility requirements. The below covers most of them.
- For HDB flats only (resale or direct purchase from HDB)
- At least one buyer must be a Singapore citizen
- Must have a gross monthly income not exceeding $10,000 (or $15,000 for extended families)
- For DBSS flat the income ceiling is $8,000 (or $10,000 for extended families)
- For applicants under the Single Singapore Citizen (SSC) scheme, the income ceiling is $5,000
- Must not own any private residence (in Singapore or abroad), including HUDC and executive condominium
- Must not have sold a private residential property within 30 months and taken a HDB loan before
- Must not have previously obtained a HDB loan within 30 months
- Must not have taken more than two previous HDB loans
- Must not own more any market / hawker stalls or commercial / industrial property (Except if you operate the business yourself, have no other source of income, and only own one market / hawker stall or commercial / industrial property)
From July 2013, HDB loan will not be granted for flats with less than 20 years of lease. In addition, for flats with lease between 20 and 59 years, loan approval and tenure will be subjected to certain conditions.
Given the many restrictions of a HDB loan, why then do Singaporeans still want to take one? We delve further into the pros of this loan in the following sections.
1. Higher CPF (Central Provident Fund) withdrawal limit
For financing by bank loans, the CPF Ordinary Account withdrawal cap is up to 100% of the valuation limit (VL), which is the lower of the purchase price or valuation at the time of purchase. If the loan is still outstanding when this limit is breached, the housing withdrawal limit can be increased to 120% VL provided that half (entire) of the prevailing Minimum Sum is set aside for borrowers below 55 (55 and above). This housing withdrawal limit varies with the purchase date of the flat, for purchases from 2008 onwards it is 120%.
With a HDB concessionary loan, however, you can enjoy a higher withdrawal limit.
For direct purchase from HDB, there is no limit to the saving in the Ordinary Account you can use.
For resale HDB flats, there is no limit to the saving in the Ordinary Account you can use, after you have set aside half of the prevailing Minimum Sum.
But from July 2013 onwards, for flats with leases between 30 and 59 years the use of CPF fund is allowed only if the remaining lease covers the buyer till at least 80. For such flats, the withdrawal limit will be computed based on the below formula:
= (The remaining lease of flat or property when the youngest owner is 55 years old / The lease of the flat or property at the point of purchase) x VL
For example, at the point of purchase the buyer is 38 years old and the lease is 40 years. When the buyer turns 55, the remaining lease will be 23 years. Hence
Withdrawal Limit = 23/ 40 x VL
Table 1 further illustrates what is VL.
Table 1: VL
|Flat A||Flat B|
|Purchase Price (S$)||400,000||370,000|
For flats with under 30 years of lease, use of CPF fund is prohibited. In other words, buyers will to cough up cash for the down-payment, monthly repayment of the loan, stamp duties and other miscellaneous fees.
2. No cash component required for the down-payment
A key advantage of a HDB loan is that you do not have to stump up any portion of the down-payment in cash. You are allowed to use the balance in your CPF (Central Provident Fund) Ordinary Account to pay for it completely.
Whereas with a bank loan, you will have to pay at least 5% of the Valuation Limit (VL) in cash. If the loan tenure exceeds 30 years or extends past the age of 65, the minimum amount jumps to 10%.
3. Higher loan quantum
For the first HDB Concessionary Rate Loan you are taking, the loan quantum is as high as 90% VL. In contrast, for bank loans, the quantum is capped at 80% LTV (loan-to-value ratio). It dips to 60% if the loan tenure exceeds 30 years or extends past age 65. Table 2 compares the down-payment components and loan ceilings for HDB and bank loans.
Table 2: Payment Structure for a HDB Flat
Maximum Loan Quantum
≥ 0% of VL
First 10% or more of VL*
≤ 90% of VL**
|Private Loan without*** Outstanding Mortgage AND• Loan tenure does not exceed 30 years; and
• Sum of loan tenure and age of borrower at the time of applying for the loan does not extend beyond retirement age of 65 years.
≥ 5% of VL
Next 15% or more of VL*
≤ 80% LTV
|Private Loan without Outstanding Mortgage
AND• Loan tenure exceeds 30 years; or
• Sum of loan tenure and age of borrower at the time of applying for the loan extends beyond retirement age of 65 years.
≥ 10% of VL
Next 30% or more of VL*
≤ 60% LTV
Source: HDB (http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/HLHDBWhat?OpenDocument)
Monetary Authority of Singapore (http://www.mas.gov.sg/~/media/resource/news_room/press_releases2013/Annex%20II.pdf)
*Do note that there is a limit to the CPF amount you can use for mortgage financing, as discussed earlier in the article.
** This loan quantum only applies to the first HDB Concessionary Rate Loan. The loan quantum for the second HDB loan will be reduced by the full CPF proceeds and part of the cash proceeds made from the sales of the previous flat.
*** Since buyers are not allowed to own more than 1 HDB flat concurrently and must dispose of their private residential properties within 6 months after buying a HDB flat, technically there shan’t be a case with an outstanding mortgage.
New regulations, that have kicked in from 12 January 2013, dictate that the mortgage servicing ratio (MSR) for private loans must not exceed 30% of the gross monthly income of the borrower and 35% for HDB loans. So do note that to be eligible for the maximum loan limits stated in Table 2, you also have to meet the MSR cap.
Effectively, this can translate into a lower loan quantum for a bank loan compared to a HDB loan.
For example, for a 30-year loan with a 80% quantum for a S$800,000 HDB flat, at an interest rate of 1.5% p.a., the monthly repayment amount will be S$1,932.67. In order to be eligible for a
- HDB loan: Gross monthly income ≥ S$5,521.92
- Private loan: Gross monthly income ≥ S$6,442.24
Thus, if your income is below S$6,442.24, you will not be eligible for a private loan of 80% LTV. If you extend the loan tenure, current rules mandate that you can only take up to 60% LTV.
Therefore, a HDB loan will allow a higher loan quantum.
4. HDB is more lenient
As a Government agency which main goals are to provide affordable quality housing and encourage home-ownership, HDB tends to be more tolerant of delinquent borrowers.
But for a loan from a financing institution, you are always required to pay the monthly stipulated amount even if you have suffered a pay cut.
Further, HDB usually grants deferment of monthly installment payment if you have fallen into financial hardship. The banks, on the other hand, will likely be hot on your heels if you defer payment even for a day!
5. No penalty for partial or full repayment of loan, interest rebate given instead
Of note, is that HDB imposes zero penalty for partial or full repayment of its loan.
Most mortgages of financial institutions, however, come with a lock-in period (aka commitment period) typically of 3-5 years. During this period, any repayment above the prior agreed amount will result in a penalty – usually at most 1.5% of the repayment amount. Financial institutions profit from the interest incurred on the loan, any partial or full repayment of the loan means a loss on interest earnings. Hence, the penalty helps to compensate for this loss.
In fact, HDB even reward you for making capital repayment. Interest rebates will be given on any amount of capital repayment made by flat owner from the next following day after payment is received. The rebate is calculated based on the below formula:
Interest Rebate = (Amount Repaid x Interest Rate) / 12 x 1/ No of Days in the Month x (No of Days in the Month – Day in which Amount is Repaid)
- HDB Interest Rate = 2.6%
- Capital Repayment = $1,000 on 20th Mar 2013
- No of Days in March = 31
Interest Rebate = (1000 x 2.6% ) /12 x 1/ 31 x (31 – 20) = $0.77
6. Stability in interest rate
Since revision to the interest rate of a HDB loan is made quarterly in tandem with changes to the CPF rate, which has been the same for over 10 years. The interest rate has, likewise, remained stagnant. A HDB loan, thus, offers relatively more stability than even a fixed-rate mortgage which rate is only fixed for 3- 5 years. This is not saying that there have been no fluctuations in HDB interest rates. For instance, in the 1990s rates demonstrated more volatility (Source: CPF, “Historical HDB Concessionary Interest Rate”).
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