Buying a HDB flat? What could happen if you need to take a bank loan?

By Ryan Ong

SINGAPORE – When you're buying a Housing & Development Board (HDB) flat, you can opt to use either a bank loan or HDB loan.

But there are cases where, due to factors such as income level, HDB may tell you to get a bank loan instead. Also, if you're purchasing an Executive Condominium (EC), there's no HDB loan for it. In these cases, what's a HDB home buyer to expect?

Here are some of the things you need to brace for:

You'll need to pay at least five per cent of your property in cash

When you use a HDB loan, there's a chance you won't need to pay anything in cash. That's because a HDB loan can cover up to 80 per cent of the price or value (whichever is lower) while the remaining 20 per cent can come entirely from your Central Provident Fund (CPF) Ordinary Account.

If you use a bank loan, however, the first five per cent of your property must always be paid in cash. You cannot use your CPF account for this.

The next 20 per cent can come from CPF, and the bank loan can cover the remaining 75 per cent (assuming you qualify for the full loan).

So, if you're buying a flat for $350,000, and you have to use a bank loan, you'll need a minimum of:

• $17,500 in cash

• $70,000 in any combination of cash or CPF (i.e. you can pay this full amount with CPF funds if you have enough)

This is before adding other costs, such as your Buyers Stamp Duty (BSD), and legal fees. The full breakdown of costs will be explained to you by the HDB representative or your realtor.

This means that, if you use a bank loan, you must plan ahead and save for the minimum cash down. Note that banks cannot lend you the money for the initial five per cent down (this is by law, under MAS notice 632).

There is a Total Debt Servicing Ratio (TDSR), as well as the Mortgage Servicing Ratio (MSR)

The MSR applies to all HDB properties. The MSR caps the home loan repayment to 30 per cent of the borrowers' monthly income.

So, if there are two borrowers for a flat, who together earn $5,000 per month, the monthly home loan repayment cannot be more than $1,500.

If it would exceed this amount, they would need to borrow less (make a bigger down payment, or buy a cheaper flat).

When you use a bank loan however, you have an additional hurdle. You must pass the TDSR, as well as the MSR.

The TDSR caps your home loan repayment to 55 per cent of the borrowers' income, but inclusive of all other debts. This means your car loan, education loans, or any other unsecured loans are included.

(For unsecured loans like credit cards, the minimum monthly repayment is used to calculate TDSR).

For this reason, borrowers who are told to take a home loan need to be active in clearing – or at least paying down – their debts. In fact, just in case HDB tells you to take a bank loan, it's a good idea to try and pay down these other debts, in the 12 months preceding your loan application.

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Bank loans have variable interest rates

There's no bank loan that has a perpetual fixed interest rate. At most, a bank loan will have a fixed rate for a few years, after which it will revert to a floating rate again.

This can be quite significant in times like today: interest rate hikes in the United States have a knock-on effect on Singapore home loans. As the rates in the US rise, the rates in Singapore will move in tandem.

Several other factors, such as geopolitical tensions or economic booms and recessions, will also cause the rate to fluctuate.

This is quite different from HDB loans, where the interest rate is always 0.1 per cent above the prevailing CPF rate (currently 2.6 per cent).

As of 2022, bank loan rates are generally higher than HDB loan rates, with some fixed rate options being well over three per cent.

Due to constantly fluctuating interest rates, and the huge number of bank loans available, it's impractical to call the banks one at a time to try and find the best deal.

If you have to use a bank loan, you should contact an independent mortgage broker to source for the cheapest bank to use. This service is free to borrowers.

Bank loans may have lock-ins and prepayment penalties

You can choose to speed up your HDB loan repayment whenever you want, at no penalty. However, this may not be the case for banks.

Many bank loans have a lock-in period, during which time you may be charged a penalty for trying to pay the loan early. This is usually 1.5 per cent of the amount you’re trying to prepay, but it can vary between banks.

The lock-in period is usually within three to five years, but you should check this with the bank as well.

If you're planning to prepay your bank home loan (also called early loan redemption), you should be careful to do so after any lock-in or penalty periods.

Also note that attempting to refinance (i.e., switch to a different bank because it's cheaper) can incur penalties, if it’s done during the lock-in period.

As you can see, bank loans do tend to be more complex, so the legal terms should be discussed with your mortgage broker.

While most HDB flat buyers can get an HDB loan, it's always best to be prepared. Pay down your debts and save up, for at least 12 months before you attempt to buy a home. That way, you'll be prepared if you're told to get a bank loan.

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