Bank Loan Vs HDB Loan 5 Key Differences: The Complete Guide to Financing Your HDB

·17-min read

Bank loan vs HDB loan: which is better? That's the question most homeowners are likely pondering over when choosing an option to finance their HDB flats. Some prefer taking on bank loans instead of paying for their homes with CPF. Others argue HDB loans provide stability and certainty.

With the interest rate at an all-time low, you might be considering getting a bank loan to finance your HDB flat. Whichever you prefer, it's good to know exactly what you're getting yourself into before committing to a home loan.

In this article, we compare the difference between a bank loan vs HDB loan so you can make a better, more informed choice. Let's get started!

Bank Loan Vs HDB Loan: An Overview

Both the HDB Concessionary Loan (better known as HDB's housing loan) and bank loans have a list of advantages and drawbacks but, as with almost anything home loan-related, what worked out for someone else, might not work for your situation. Here’s an overview of their main differences.

HDB Housing Loan

Bank Loan

What it is

Home loan from the Housing & Development Board (HDB)

Home loan from banks in Singapore, e.g. DBS, UOB, etc

Borrower eligibility

Several requirements in place such as income ceiling and citizenship requirements

Usually, a good credit score will suffice, no income ceiling

Property eligibility

HDB flats only

Both HDB flats and private property

Minimum loan size

None

Usually at least $100,000

Loan-to-Value limit

Can borrow up to 90% of property value

Can borrow up to 75% of property value

Downpayment

10% of purchase price, can be fully paid with CPF Ordinary Account (OA) savings

Note: for resale flats, you need to pay up to $5,000 for deposit to seller.

25% of purchase price, at least 5% must be in cash, the rest can be paid with CPF OA savings

Interest rates

Currently 2.6% p.a., pegged at +0.1% of CPF OA interest rate

Currently 1.5% to 2.8% p.a., but depends on the market situation

Maximum loan tenure

Up to 25 years

Up to 30 years

Prepayment or early repayment penalty

None

Usually 1.5% to 1.75%

Late repayment penalty

7.5% p.a.

Depends on the bank, but usually not as lenient as HDB

Now, before we go further, you’ll need to first ask yourself: which housing loans are you eligible for?

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Bank Loan Vs HDB Loan: Eligibility Criteria

Sometimes, you may not have a choice on which of the two loan types to take. As you may have noticed, if you are looking to finance a private property (i.e. condo or landed home), then you are not eligible for HDB housing loans. Your only option is to go with a bank loan.

If you’re buying an HDB flat—be it a new or resale flat—hurray! You may be eligible for an HDB housing loan.

HDB Housing Loan Eligibility

We use ‘may’ because the eligibility criteria for the HDB housing loan is quite stringent. Here, have a look:

Citizenship

At least 1 buyer is a Singapore Citizen

Household Status

Have not previously taken 2 or more housing loans from HDB, Have taken 1 housing loan from HDB and the last owned property is not a private residential property (local or overseas) such as: HUDC flat, property acquired by gift, property inherited as a beneficiary under a will or as a result of the Intestate Succession Act, property owned/ acquired/ disposed of through nominees

Income Ceiling

Average gross monthly household income does not exceed $14,000 for families, $21,000 for extended families, $7,000 for singles buying a 5-room or smaller resale flat or a 2-room new flat in a non-mature estate, under the Single Singapore Citizen (SSC) Scheme

Property Ownership

You don’t own any other property locally or overseas, and haven’t disposed of any within the last 30 months prior to applying for your HDB Loan Eligibility letter. You also don’t own more than 1 market/hawker stall or commercial/industrial property. If you do own one of these, you must be operating your business there and have no other sources of income

In addition to the above, you will need to complete a questionnaire for HDB to assess your eligibility beforehand as well. If you've decided you want to take on an HDB loan, you have to secure an HDB Home Loan Eligibility (HLE) letter.

Bank Home Loan Eligibility

The eligibility criteria for a bank loan isn’t as stringent as HDB’s. Each bank has its own method of assessment, but generally, as long as you are in good financial health and have a good credit score, you’re good.

If you're not sure what the bank loan criteria are or which bank to approach, you can approach one of our friendly home finance advisors for help.

For Both HDB and Bank Loans, TDSR and MSR (for HDB Flats) Will Apply

Next up, remember that regardless of HDB or bank loan, the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) restrictions will apply. These frameworks are put in place by the government (and not HDB, or the banks) to ensure people don’t borrow more than they can afford.

Total Debt Servicing Ratio (TDSR)

Whichever you pick, all home buyers will also be restricted by the TDSR. Basically, how much you can borrow will be limited by your monthly repayments, which must not exceed 60% of your monthly income.

The TDSR is a restriction for all your liabilities (so not just your mortgage), which means that if you’re already servicing multiple loans, you might not be able to take out a housing loan (or may have to loan less).

Mortgage Servicing Ratio (MSR)—For HDB Properties Only, Including EC

If you’re buying an HDB property (including executive condominiums), you will also be restricted by the MSR which states that your monthly repayments for a mortgage cannot exceed 30% of a borrower and/or joint borrower's monthly income.

Now that we’re all clear on the loan eligibility and government restrictions, let’s get down to comparing the HDB housing loan and bank loans.

Bank Loan Vs HDB Loan: The Key Differences

Assuming you’re eligible for both the HDB housing loan and bank loans, here are the key differences between the two.

HDB housing loan

Bank loan

Loan-to-Value (LTV) limit

Can borrow up to 90% of property value

Can borrow up to 75% of property value

Downpayment

10% of purchase price, can be fully paid with CPF OA savings. Note: for resale flats, you need to pay up to $5,000 for deposit to seller.

25% of purchase price, at least 5% must be in cash, the rest can be paid with CPF OA savings

Minimum loan size

None

Usually at least $100,000

1. Bank Loans Have a Tighter LTV, but Borrowing Less Also Means More Savings in the Long Run

HDB housing loan LTV: Up to 90%

The HDB housing loan covers as high as 90% of the purchase price for new flats, and the lower of either the resale price or market value for resale flats.

Although it may seem better that you can borrow more funds, getting a bigger loan could mean you end up paying more interest in total.

Also, do note that the 90% limit is subject to CPF balances. HDB requires each lessee's CPF Ordinary Account (OA) balances to be wiped out (except for a maximum amount of S$20,000). This means that if you have a substantial CPF balance, you may not be able to obtain a 90% LTV loan. This isn't the case for bank loans.

Bank Loan LTV: Up to 75%

In contrast, bank loans cover only up to 75% of the purchase price. This 15% difference is significant as it would mean a much larger downpayment, which can put a real dent in your finances, especially if you are tight on cash and/or CPF savings.

If, after assessing your finances, you find that you can afford the cash outlay required for bank loans, the lower interest rates and smaller loan size will result in more savings overall.

Also read: 4 Key Reasons Not to Use CPF to Buy a Condo or HDB Flat in Singapore

2. Bank Loans Require a Higher Downpayment, Which Can Be Difficult for Cash Flow

As seen in the previous section, HDB allows you to borrow more than banks. This, in turn, would also mean a more manageable downpayment of 10% (as opposed to 25%).

With both HDB and bank loans, you can make use of your CPF OA savings to service the downpayment. However, there is a difference in how much you can use in the longer term, and hence, how much cash you’ll have to pay upfront.

HDB Housing Loan Downpayment: Minimum 10%, Can Be Fully Paid with CPF OA

Assuming a direct purchase, when you take out an HDB housing loan, the minimum downpayment is 10%, which you can pay off fully with your CPF if you have enough savings in your Ordinary Account. This means you may not need to fork out a single cent (for your downpayment at least).

Bank Loan Downpayment: Minimum 25%, of Which 5% Must Be in Cash

Bank loans require a significantly higher downpayment of 25%. Of that, at least 5% needs to be made in cash, while the remaining 20% can come from housing grants or your CPF.

Having difficulty visualising how the percentages translate into dollars and cents? Here’s an example.

Let’s say you buy a $600,000 home

If you take an HDB loan

If you take a bank loan

Total downpayment

$60,000 (10% of $600,000)

$150,000 (25% of $600,000)

How much CPF OA can you use?

$60,000 (full amount of the downpayment)

$120,000 (20%)

Cash upfront

If you have enough in your CPF OA, no cash is needed

$30,000 (5%), and the difference that is needed if CPF OA is not sufficient to cover the full 20%

Exception: If you are buying a resale flat, you will need to account for the deposit to the seller, which is an upfront cash cost that can go up to $5,000.

You can also use the CPF housing usage calculator to calculate how much of their CPF you can use for your property purchase. Also use our affordability calculator to see how much your downpayment, monthly instalment and length of loan tenure is, among other factors.

Generally, the HDB housing loan usually requires less cash downpayment upfront, which is preferable for those with limited cash savings and/or cash flow issues, like many young couples buying their first BTO.

That said, always remember that while HDB housing loans require less upfront, they can be more expensive overall, especially if you take a bigger loan to reduce your downpayment. Bank loans require a higher downpayment, but offer more potential cost savings if you can afford the upfront cost.

3. Bank Loan Interest Rates Are Currently Lower, but HDB Housing Loan Interest Rates Are More Stable

HDB housing loan

Bank loan

Interest rates

Currently 2.6% p.a., pegged at +0.1% of CPF OA interest rate

Currently 1.5% to 2.8% p.a., but depends on the market situation

Types of packages

Only one type

Fixed and floating rate packages available

How stable is it?

Stable, interest rate hasn’t changed since 1999

Can fluctuate, interest rates offered depend on market conditions and are only for a few years

If you compare the two, it’s obvious that HDB’s interest rate of 2.6% is higher than what most banks are currently offering (1.5% to 2.8%). However, HDB’s interest rates haven’t changed in over a decade, which may be preferable for the risk-averse. Conversely, bank home loan interest rates are more volatile, which is more suitable for those with a bigger risk appetite.

HDB Loan Interest Rate: 2.6%, Hasn’t Changed Since 1999

The HDB loan interest rate is pegged at +0.1% of the prevailing Central Provident Fund Ordinary Account rate. (The CPF rate, in turn, is based on the average interest rate offered by the major local banks over a three-month period or a minimum of 2.5%—whichever is higher.)

As of the time of writing, the interest rate for HDB loans is 2.6% p.a. This rate is higher than what most banks offer, and hasn’t changed since July 1999.

Bank Loan Interest Rates: May Be Lower Than HDB but More Volatile

The rates that banks offer currently fall in the range between 1.5% to 2.8%. Although generally lower than HDB, the downside is that bank rates are more prone to fluctuation, especially if you pick a variable or floating rate-type package.

Banks offer two types of mortgage packages: floating rate and fixed rate.

Floating Rate Bank Loans

Floating rate packages are pegged to a benchmark interest rate, with a spread that’s fixed for the lock-in period (e.g. 3M SIBOR + 0.8% for 3 years). Floating rates are more volatile as they fluctuate with the benchmark rate (e.g. 3M SIBOR), usually according to market conditions. Read more about SIBOR, what it is and how does it affect your choice of loan here.

Fixed Rate Bank Loans

Fixed rate packages, on the other hand, guarantee you a certain rate for an agreed lock-in period (e.g. 2% for 3 years). Although fixed rates are more stable, you’ll only be guaranteed the same interest rate for a few years (3 to 5 years at most). Also, due to this relative stability, fixed rates are often offered at a premium compared to variable rate packages.

After the lock-in period, your interest rate will depend on the whims of the market (read: it usually goes up!). You can read more about floating vs fixed rate bank loans here. Fixed vs Floating Rate Home Loans: How to Pick the Right One

4. You Can Refinance From an HDB Loan to a Bank Loan, but Not the Other Way Around

HDB housing loan

Bank loan

Refinancing options

Can switch to bank loan

Can refinance with other banks, but cannot switch back to HDB housing loan

Minimum loan size

None

Usually at least $100,000

Prepayment or early repayment penalty

None

Usually 1.5% to 1.75%

Late repayment penalty

7.5% p.a., but can be negotiated

Depends on the bank, but usually not as lenient as HDB

If, after a few years, you decide you want to switch from an HDB housing loan to a bank loan for lower interest rates, you can do so. However, the reverse is not possible.

If you opt for a bank loan, you are automatically disqualified from switching (or switching back) to an HDB housing loan. Instead, after your lock-in period, you will have to either reprice with a new package from the same bank, or refinance with another bank. For example, after a 3-year home loan with DBS, you will need to decide if you want to negotiate for a new DBS home loan, or look for other banks (like OCBC, UOB, etc) to loan from.

If you’re currently on a bank loan and are puzzled by the concept of refinancing to actively manage your home loan, feel free to reach out to PropertyGuru’s Home Finance Advisors for some free advice and guidance.

Also read: How to Refinance from HDB Housing Loan to Bank Loan

5. There Are Higher Penalties When It Comes to Bank Loans

With tenures spanning several decades, a home loan is a long-term commitment. As such, it’s important to consider your future plans at each stage of your decision-making.

Generally, HDB loans are more flexible in that there is a lot more wriggle room for changes in your financial situation. If you stumble onto a windfall (maybe you struck 4D?), you can pay off however much you want without penalty. If, after a few years, you decide you want to switch to a bank loan for lower interest rates, you can do so as well.

If you run into financial difficulties (choy!), there is a late repayment fee of 7.5% p.a. (on the amount that is late, not the full loan), but you can appeal your case. HDB is known to be more lenient than banks.

For bank loans, there is usually a penalty of 1.5% to 1.75% if you decide to make early repayments within the lock-in period to reduce your loan size. Banks’ late repayment fees differ from bank to bank, and are much harder to get waived or reduced.

In the event of a default in mortgage payments, banks may explore debt consolidation plans/restructuring programmes with you to help improve your situation. If nothing can be done, the bank has the right to repossess the property and put it up for a mortgagee sale (auction) as a last resort to recover whatever you owe.

Bank Loan vs HDB Loan: Which Should You Pick?

If you’ve gotten this far and are still on the fence, here’s one last question to ask: are you motivated by cost savings, or are you the kind who won’t mind paying a little more to avoid the hassle? This may influence whether an HDB or bank loan is more suitable for you.

HDB Housing Loans Are More Expensive, but Less Hassle

Although featuring what’s currently a higher interest rate of 2.6% p.a., an HDB loan, once locked in, more or less looks after itself. The interest rates for an HDB loan are consistent and stable, making it easier to do long-term planning as you know exactly how much you’ll need to set aside every month for repayments.

Also, since lower downpayment is required, if you’re tight on cash, an HDB loan may be more manageable. They also don’t have prepayment penalties and if you have to defer payment for any reason, it’s easier to negotiate with HDB.

If, after several years, your finances improve and you want to switch to a bank loan, you are free to do so.

Bank Loans Are Usually Cheaper but Require a Review Every Few Years

Most homebuyers who pick bank loans do so because of the significant savings that come with lower interest rates. However, as mentioned, to enjoy this, you must first make sure you can afford the min. 25% downpayment.

Additionally, it’s wise to remember that the attractive bank home loan interest rates are only locked in for three to five years, after which they tend to get more expensive.

Unlike getting an HDB loan which is mostly a one-time thing, if you want to continue maximising savings and enjoying competitive interest rates, you will need to refinance each time your lock-in period ends.

There is no right or wrong here: While some customers see taking an active interest in their loan as a small price to pay for the potential savings that can be made by refinancing, others may prefer the lower maintenance of the HDB loan.

More FAQs Related to Comparing Bank Loan Vs HDB Loan

Should I Take an HDB Loan or Bank Loan?

In the long term, bank loans can be cheaper as their interest rates are generally lower than HDB’s interest rate which is pegged at 2.6%. However, taking up a bank loan requires you to fork out more cash upfront for your downpayment.

Can I Switch from a Bank Loan to an HDB Loan?

No. Unlike the flexibility that HDB loans offer for you to switch to a bank loan, the same does not apply in the reverse. If you are thinking of refinancing, you may do so by taking up another loan with the bank.

Can I Use CPF for My Bank Loan?

Yes, you can use up to 120% of the Valuation Limit (VL) of your house with your CPF to finance your bank loan.

How Can I Get a Loan from HDB?

You will first need to apply for a Home Loan Eligibility (HLE) letter. This can be done via the HDB website.

How Do I Refinance My HDB Loan to a Bank Loan?

Read more about it here!

For more tips and tricks on financing your property purchases, check out PropertyGuru's home financing guides.

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