Compare an HDB concessionary loan with a bank loan on rate, flexibility and limits.
If you're buying an HDB flat and can borrow from either HDB or a bank, compare five things: how the rate behaves, how much cash the downpayment needs, how flexible the loan is, whether you qualify, and the rule that lets you leave an HDB loan but never go back to one. This only applies to buyers who have the choice. For an EC (executive condominium) or a private home, the only option is a bank loan.
Farah and Hakim have the choice. Their HDB Flat Eligibility letter, the HFE letter, says they can take an HDB loan. Farah's parents took an HDB loan for their flat and never thought about it again. Their rate barely moved for decades, and they paid the loan off quietly from CPF. Farah wants the same quiet decades. Hakim prefers the lower bank rate. His sister Aisyah took a bank loan for her home and talks about interest rates the way other people talk about the weather. In some years she saved a lot, and in others she paid a lot more. Farah and Hakim can't agree, so they've decided to compare real numbers before they choose.
The HDB concessionary loan is HDB's own housing loan for eligible flat buyers. Its rate is pegged to the CPF Ordinary Account (OA) interest rate and set a little above it. The government reviews the CPF OA rate, and that rate has a floor. Because of the peg, the HDB loan rate has moved far less than bank rates over the years. What an HDB loan mainly gives you is a steady rate. You miss the very low bank rates when market rates fall, and you also avoid the sharp rises. Check the current HDB loan rate on the HDB website.
Bank packages are priced off market rates, and the HDB rate isn't. Bank loans tend to cost less when market rates are low. They tend to cost more when market rates rise, once any fixed period has ended.
They want to borrow S$427,000 over 25 years (example figures). At an HDB loan rate of 2.8% a year (invented for the arithmetic, and used for every comparison in this module), the instalment is S$1,980.74 a month.
A bank offers them a package at 2.35%, fixed for 3 years (an invented example). On the same S$427,000 over 25 years, they would pay S$1,883.50 a month during the three fixed years. That is about S$97 a month less than the HDB loan (S$1,980.74 minus S$1,883.50).
After the fixed period ends, the bank rate could be higher or lower. The HDB rate would probably still be close to where it was. Nobody knows which way rates will go over a 25-year loan, so a fair comparison comes down to what you can live with. Lesson 5.5, "Compare an HDB loan and three bank packages", runs this comparison out for the whole loan.
The first difference is the downpayment. A bank loan needs a minimum part of the downpayment in cash. An HDB loan doesn't, so if your CPF Ordinary Account balance is big enough, the whole downpayment can come from it. If you have healthy CPF but little cash, this rule alone can decide the choice. Lesson 4.1, "LTV limits and the cash you must put in", explains it in full.
The second difference is flexibility. HDB loans have no lock-in, and you can make partial repayments without a penalty. Bank packages usually have a lock-in period: if you repay or refinance during it, you pay a penalty. Lesson 5.3, "Lock-ins, clawbacks and the real cost of a package", works through those penalties.
The third difference is eligibility. Not everyone can take an HDB loan. The conditions cover your household income, what property you own or have owned, and how many HDB loans you've taken before. Your HFE letter states whether you qualify for an HDB loan and for how much. Banks lend under the MAS rules from Module 4 (the MSR and TDSR) and their own credit assessment.
You can move from an HDB loan to a bank loan at any time by refinancing. You can never move back. Once a flat leaves its HDB loan for a bank loan, that flat can never have an HDB loan again. So if you choose a bank loan when you buy, you give up HDB's steadier rate for the whole life of the loan. For this reason, some buyers start with an HDB loan. It keeps the option of refinancing to a bank later if bank rates look attractive, and they would lose that option by starting with a bank.
An HDB loan suits you if you want a steady instalment, need to keep your cash, or want to keep the option of switching later. A bank loan suits you if you're comfortable watching rates and acting when a lock-in ends, have the cash for the downpayment, and want to benefit when rates are low. Neither type is right for everyone. Your HFE letter only tells you whether you can choose. It doesn't tell you which loan to pick.
To make the decision:
Check your HFE letter to see whether you can take an HDB loan, and for how much. Look up the current HDB loan rate on the HDB website. Gather real bank packages to compare. Compare the monthly instalments, including each package's fixed period and what might happen after it ends. Weigh the cash needed for the downpayment, the lock-in and its penalties, and the fact that leaving an HDB loan is permanent. Decide on what you can live with rather than on a forecast of rates.
Farah and Hakim will start with the current HDB rate and two bank packages. That comparison is the activity below.
Look up the current HDB loan rate and two bank package rates. Write them down with one reason you might pick each.
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