How Much Is A 30-Year Fixed-Rate Mortgage Going For Explaining the Advantages of HDB Loans Versus Bank Loans (An Abridged Version)

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Explaining the Advantages of HDB Loans Versus Bank Loans (An Abridged Version)

Before 1 January 2003, people buying an HDB (Housing Development Board) flat had to finance it with either an HDB prime rate loan or an HDB market rate loan. But the HDB market rate loan has since been replaced by a residential mortgage from financial institutions that are published by the Monetary Authority of Singapore.

HDB loan with preferential interest rate

Compared to a housing loan from a financial institution, an HDB loan has stricter eligibility requirements. Most of them are described below.

Eligibility Criteria:

  • Only for HDB flats (resale or direct purchase from HDB)
  • At least one buyer must be a citizen of Singapore
  • You must have a gross monthly income not exceeding $10,000 (or $15,000 for extended families)
  • For a DBSS apartment, 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 floor
  • Must not have sold a private residential property within 30 months and taken an HDB loan before
  • Must not have previously received an HDB loan within 30 months
  • Must not have taken more than two previous HDB loans
  • Must not own more than one dispensary market/stall or commercial/industrial property (Unless you run the business yourself, have no other source of income and own only one dispensary market/stall or commercial/industrial property)

From July 2013, HDB credit will not be granted for flats with a contract of less than 20 years. In addition, for apartments with leases between 20 and 59 years, loan approval and tenure will be subject to certain conditions.

Given the many limitations of the HDB loan, why then do Singaporeans still want to take one? We delve into the benefits of this loan in the following sections.

1. Higher CPF (Central Provident Fund) withdrawal limit.

For financing through bank loans, the CPF Ordinary Account withdrawal cap is up to 100% of the Valuation Limit (VL), whichever is the lower of the purchase price or the valuation at the time of purchase. If the loan is still outstanding when this limit is violated, the housing withdrawal limit can be increased to 120% VL, provided that half (the whole) of the prevailing minimum amount is set aside for borrowers under 55 (55 and over). This home withdrawal limit varies depending on the date of purchase of the apartment, for purchases from 2008 onwards it is 120%.

However, with a concessional HDB loan, you can enjoy a higher withdrawal limit.

For direct purchase from HDB, there is no limit on the saving in the ordinary account that you can use.

For resale HDB flats, there is no limit on savings in the ordinary account that you can use once you have set aside half of the prevailing minimum amount.

But from July 2013 onwards, for flats with tenancies between 30 and 59 years, the use of CPF fund is only allowed if the remaining rent covers the buyer till at least 80. For such flats, the withdrawal limit will be calculated based on the formula below :

Withdrawal limit

= (The remaining lease of the apartment or property when the youngest owner is 55 years old / The rent of the apartment or property at the time of purchase) x VL

For example, at the time of purchase, the buyer is 38 years old and the lease is 40 years old. When the buyer turns 55, the remaining lease will be 23 years. Therefore

Withdrawal limit = 23/40 x VL

Table 1 further illustrates what VL is.

Table 1: VL

Flat A

Purchase price (S$) = 400,000

Estimate (S$) = 350,000

VL (S$) = 350,000

Flat B

Purchase price (S$) = 370,000

Estimate (S$) = 420,000

VL (S$) = 370,000

For apartments with a lease of less than 30 years, the use of CPF fund is prohibited. In other words, buyers will buy cash for down payment, monthly loan repayment, stamp duty and other miscellaneous charges.

2. No cash component is required for the down payment

A key advantage of an HDB loan is that you do not need to pay any part of the down payment in cash. You are entitled to use the balance in your CPF (Central Provident Fund) Ordinary Account to pay it in full.

Whereas with a bank loan, you will have to pay at least 5% of the Valuation Limit (VL) in cash. If the term of the loan exceeds 30 years or exceeds the age of 65, the minimum amount jumps to 10%.

3. Higher loan amount

For the first HDB concessional loan you take out, the loan amount is up to 90% VL. In contrast, for bank loans, the amount is limited to 80% LTV (loan-to-value ratio). It drops to 60% if the loan term exceeds 30 years or exceeds 65 years of age.

The new regulations, which came into effect on 12 January 2013, dictate that the mortgage servicing ratio (MSR) for private loans must not exceed 30% of the borrower’s gross monthly income and 35% for HDB loans.

Effectively, this can translate into a lower loan amount for a bank loan compared to an HDB loan.

For example, for a 30-year 80% loan amount for an HDB flat of S$800,000, at an interest rate of 1.5% per annum, the monthly repayment amount would be S$1,932.67. 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 qualify for an 80% LTV private loan. If you extend the term of the loan, current rules only require you to take up to 60% LTV.

Therefore, the HDB loan will allow a higher loan amount.

4. HDB is more lenient

As a government agency whose primary objectives are to provide quality affordable housing and promote home ownership, the HDB tends to be more tolerant of defaulting borrowers.

But for a loan from a financing institution, you are always required to pay the specified monthly amount, even if you have suffered a reduction in salary.

In addition, HDB usually provides deferment of monthly installment payment if you have fallen into financial difficulties. Banks, on the other hand, are likely to be on your heels if you delay paying for even a day!

5. No penalty for partial or full repayment of the loan

It should be noted that HDB imposes zero penalty for partial or full repayment of its loan.

However, most financial institution mortgages come with a lock-in period (also known as a commitment period), usually of 3-5 years. During this period, any repayment over the pre-agreed amount will result in a penalty – usually no more than 1.5% of the repayment amount. Financial institutions earn from the interest on the loan, any partial or full repayment of the loan means a loss of interest earnings. Punishment therefore helps to compensate for this loss.

6. Stability of the interest rate

As HDB loan interest rate revision is done quarterly in tandem with changes in CPF interest rate which has been the same for more than 10 years. The interest rate also remains stagnant. Thus, HDB loan offers relatively more stability than even a fixed rate mortgage which is fixed for only 3-5 years. This is not to say that there have been no fluctuations in HDB interest rates. For example, in the 1990s, interest rates demonstrated greater volatility.

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