You will be able to compare an HDB concessionary loan with a bank loan on rate, flexibility and limits.
Farah's parents took an HDB loan for their flat and never thought about it again. The rate barely moved for decades, and they paid it off quietly from CPF. Hakim's sister Aisyah took a bank loan for hers, and talks about interest rates the way other people talk about the weather. She saved a lot in some years and paid a lot more in others. When Farah and Hakim's HDB Flat Eligibility letter said they could take an HDB loan, they had to decide which kind of borrower they wanted to be.
For an HDB flat, you can borrow from HDB or from a bank. For an EC or private home, only a bank. This lesson compares the two for buyers who have the choice.
The HDB concessionary loan is HDB's own housing loan for eligible flat buyers. Its interest rate is pegged to the CPF Ordinary Account interest rate, and set a little above it. Because the OA rate is reviewed by the government and has a floor, the HDB loan rate has moved far less than bank rates over the years.
That steadiness is the main thing you are buying. You won't get the very low rates banks offer when market rates fall, but you won't feel the sharp rises either. Check the current HDB loan rate on the HDB website. For the comparisons in this module, take 2.8% a year as an example rate, invented for the arithmetic.
The downpayment is the first difference. As lesson 4.1, LTV limits and the cash you must put in, explained, a bank loan needs a minimum part of the downpayment in cash, while an HDB loan does not. With an HDB loan, the whole downpayment can come from your CPF Ordinary Account if the balance is there. For buyers with healthy CPF but little cash, that alone can decide it.
Flexibility is the second. HDB loans have no lock-in period, and you can make partial repayments without a penalty. Bank packages usually come with a lock-in, and repaying or refinancing during it costs a penalty, which lesson 5.3, Lock-ins, clawbacks and the real cost of a package, works through.
Eligibility is the third. Not everyone can take an HDB loan. There are conditions on household income, on what property you own or have owned, and on how many HDB loans you have taken before. Your HFE letter states whether you qualify and for how much. Banks lend under MAS rules, the MSR and TDSR from module 4, and their own credit assessment.
You can move from an HDB loan to a bank loan at any time, by refinancing. You can't move back. Once you leave the HDB loan for a bank, that flat will never have an HDB loan again.
So choosing a bank loan at purchase isn't only a choice about rates for the next few years. It gives up the option of HDB's steadier rate for the whole life of the loan. Some buyers start with an HDB loan for exactly that reason: they keep the option to refinance to a bank later if bank rates look attractive, which they would lose by starting with a bank.
Bank loans tend to cost less when market interest rates are low, because packages are priced off market rates and HDB's rate isn't. They tend to cost more when market rates rise, once any fixed period ends. Nobody knows which way rates will go over a 25-year loan, so the honest comparison is about what you can live with.
In this example, on Farah and Hakim's S$427,000 loan over 25 years, an HDB loan at the example 2.8% would cost S$1,980.74 a month. A bank package fixed at an example 2.35% for three years would cost S$1,883.50 for those three years, about S$97 a month less. After that, the bank rate could be higher or lower, and the HDB rate would probably still be close to where it was. Module 5's exercise, lesson 5.5, Compare an HDB loan and three bank packages, runs this out for the whole loan.
An HDB loan suits buyers who want a steady instalment, need to keep their cash, or want to keep the option of switching later. A bank loan suits buyers who are 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 is right for everyone, and the HFE letter only tells you whether you can choose.
Farah and Hakim were split. Hakim liked the lower bank rate. Farah liked her parents' quiet decades. They agreed to compare real numbers before deciding, starting with the current HDB rate and two bank packages, which is the activity below.
Write the current HDB loan rate and two bank package rates you can find, and one reason you might pick each.
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