How Many Ounce Of Formula For A 3 Month Old Explaining the Advantages of HDB Loans Versus Bank Loans (An Abridged Version)

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

Before 1 January 2003, people buying an HDB (Housing Development Board) flat must finance it with either an HDB Concessionary Rate Loan or an HDB market rate loan. But since then the HDB market loan has been replaced by a home mortgage from financial institutions that are announced by the Monetary Authority of Singapore.

HDB Tax Concession Loan

Compared to a home loan from a financial institution, an HDB loan has stricter eligibility requirements. The below covers most of them.

Eligibility Criteria:

  • Only for HDB flats (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 overseas), including HUDC and executive condominium
  • Must not have sold a private residential property within 30 months and taken an HDB loan before
  • Must not have previously obtained an HDB loan within 30 months
  • Must not have taken more than two previous HDB loans
  • Must not own additional markets / hawkers or commercial / industrial properties (Unless you operate the business yourself, have no other source of income, and own only one market / hawker or commercial / industrial property)

From July 2013, an HDB loan will not be granted for flats with less than 20 years of lease. In addition, for apartments with rent between 20 and 59 years, loan approval and tenure will be subject to certain conditions.

Given the many limitations of an HDB loan, why then do Singaporeans still want to take one? We elaborate on the benefits of this loan in the following sections.

1. Higher CPF (Central Provident Fund) withdrawal limit.

For bank loan financing, the CPF Current Account overdraft limit 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 residential withdrawal limit can be increased to 120% VL provided that half (total) of the prevailing Minimum Amount is reserved for borrowers under 55 (55 and over). This residential withdrawal limit varies according to the purchase date of the apartment, for purchases since 2008 it is 120%.

With an HDB concessional loan, however, you can enjoy a higher withdrawal limit.

For direct purchase from HDB, there is no limit to the savings in the Ordinary Account that you can use.

For resale HDB flats, there is no limit to the savings in the Ordinary Account that you can use once you have set aside half of the prevailing Minimum Sum.

But from July 2013 onwards, for apartments with tenancy between 30 and 59 years the use of CPF fund is allowed only if the remaining lease covers the buyer until at least 80. For such apartments, the withdrawal limit will be calculated based on the formula below. :

Limit of withdrawal

= (The remaining rent of an apartment or property when the youngest owner is 55 years old / The rent of the apartment 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 old. When the buyer turns 55, the remaining lease will be 23 years. Therefore

Limit of withdrawal = 23/ 40 x VL

Table 1 further illustrates what VL is.

Table 1: VL

Flat A

Purchase Price (S$) = 400,000

Valuation (S$) = 350,000

VL (S$) = 350,000

Plate B

Purchase Price (S$) = 370,000

Valuation (S$) = 420,000

VL (S$) = 370,000

For apartments with less than 30 years of lease, use of CPF fund is prohibited. In other words, buyers want to spend cash for the down payment, monthly repayment of the loan, stamp duty and other various fees.

2. No cash component required for the down payment

A major advantage of an HDB loan is that you don’t have to pocket any part of the down payment in cash. You can use the balance in your CPF (Central Provident Fund) Ordinary Account to pay it in full.

While with a bank loan, you will have to pay at least 5% of the Valuation Limit (VL) in cash. If the loan period exceeds 30 years or extends beyond the age of 65, the minimum amount jumps to 10%.

3. Higher loan amount

For the first HDB Concessionaire Loan you take, the loan amount is as high as 90% VL. In contrast, for bank loans, the amount is limited to 80% LTV (loan-to-value ratio). It drops to 60% if the loan period exceeds 30 years or extends beyond the age of 65.

New regulations, which came into effect from 12 January 2013, dictate that the mortgage service ratio (MSR) for private loans must not exceed 30% of the borrower’s gross monthly income and 35% for HDB loans.

Effectively, this can translate to a lower loan amount for a bank loan compared to an HDB loan.

For example, for a 30-year loan with 80% quantum for a S$800,000 HDB flat, with an interest rate of 1.5% pa, the monthly repayment amount will be S$1,932.67. 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 an 80% LTV private loan. If you extend the loan term, current rules require that you can only take up to 60% LTV.

Therefore, an HDB loan will allow a higher loan amount.

4. HDB is softer

As a government agency whose main objectives 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 financial institution, you must always pay the monthly stipulated amount even if you have suffered a salary reduction.

Furthermore, HDB usually grants a deferment of monthly installment if you have fallen into financial difficulties. The banks, on the other hand, are likely to be hot on your heels if you delay payment even by a day!

5. No penalty for partial or full loan repayment

It is worth noting that HDB requires zero penalty for partial or full repayment of its loan.

Most mortgages from financial institutions, however, come with a lock-in period (aka commitment period) typically of 3-5 years. During this period, any refund over the previously agreed amount will result in a penalty – usually a maximum of 1.5% of the refund amount. Financial institutions profit from the interest made on the loan, any partial or full repayment of the loan means a loss on interest income. Therefore, the penalty helps to compensate for this loss.

6. Stability in interest rate

Because a revision to the HDB loan interest rate is done quarterly in tandem with changes to the CPF rate, which has been the same for more than 10 years. The interest rate, likewise, remained stagnant. An HDB loan, therefore, offers relatively more stability than even a fixed-rate mortgage, which rate is only fixed for 3-5 years. This is not to say that there have been no fluctuations in HDB interest rates. For example, in the 1990s rates showed more volatility.

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