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

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.

Eligibility Criteria:

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:

Withdrawal Limit

= (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

Purchase Price (S$) = 400,000

Valuation (S$) = 350,000

VL (S$) = 350,000

Flat B

Purchase Price (S$) = 370,000

Valuation (S$) = 420,000

VL (S$) = 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.

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.

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

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.

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.

An Auto Title Loan Is A Secured Loan Until Paid Off, Completely

Secured debts are not all the same. Depending on what type of loan you receive, payments may be extended over decades or expected within 30 days. The one aspect to a secured loan is that if the loan is defaulted up on in any way, the lender may seize the property which was used to secure the initial loan. An auto title loan uses the pink slip where as a second mortgage would use your home’s title.

People looking for much needed cash tend to overlook the potential consequences of secured loans. Reading through the terms and conditions of any type of loan is essential prior to signing.

The short-term style to this loan brings fast money to the wallet of the applicant, but the 30 payoff expectancy, accompanied by high interest, when not paid off on time can bring a stressful financial situation to the next level of crazy. These title loans carry fees which are included in the loan payoff. The high interest creates budget woes each month and when a person has to take money from other monthly payments in order to keep paying against the interest, trouble brews all over. A lender has the right to seize the vehicle for any type of default on the loan. Some lenders may forgive errors in order to collect more in the long run. Unfortunately, you may find a lender which will take the car for resale automatically instead of dealing with the hassle of collecting past due moneys. Questions about collections practices are valuable to inquire about prior to signing.

When you have used your home as collateral for a new loan, most often there already is a loan out for the initial purchase. Second mortgages or refinancing loans are often done in order to obtain extra money for repairs or improvements. These types of loans are processed through banks, credit unions or private mortgage brokers; the process may take a few weeks and credit history is a large factor in approval. The interest is much lower for these long-term loans and the monthly payments are calculated to be something affordable or the loan will not push through. Just like the title loan, if loans go into default your home will be at risk of seizure. A bank can put your home on auction and give you four days to move out. It wasn’t part of the plan when you took out the loan, but how you managed the debt may result in this or similar actions.

Guarantors are people who co-sign on loans. A lender feels more secure loaning to a person with no credit or poor credit because a person with great credit has signed to take responsibility for the loan if the borrower fails. There is no property loss, but a relationship could be ended as the result of the loan gone badly.

Whether you need $2,000 or $20,000, a secured loan is an option for lenders to do business with people that may present a larger risk factor. Something to keep in mind is that a bank or auto title lender has the option to seize your property up until the loan is fully paid off. It would be a shame to lose your home or car when the build of the loan has been paid.