Financing your BTO
For most Singaporeans, the first sign of adulthood comes in the form of choosing your BTO. It is an exciting process, but a daunting one.
If you’re here, you probably have the same nagging question in your mind that many Singaporeans face:
Should I use a HDB loan or Bank loan for my BTO?
Not to worry. Join our residential celebrity Mortgage Tailor – Tailor Sweet – as she breaks down the age old debate in simple practical terms, so you can decide what actually works best for you.
TLDR
(So HDB loan or Bank loan?)
I’ll be honest.
If you want a safe, low-stress option, go with HDB loan.
But if you want to optimise your money and potentially save tens of thousands, bank loan is the way to go.
Skip the reading, talk to a real human
Table of Contents
Why many buyers eventually choose bank loans.
1. Bank Loans = Lower Interest Rates = Huge Savings
2. Bank loans provide better wealth strategy
3. Bank loans let you ride on the correct tide
Why buyers still choose HDB loans
HDB Loan or Bank Loan? At a glance.
| Factor | Ah Gong (HDB Loan) | Licensed Ah Long (Bank Loan) |
|---|---|---|
| Interest rate | Fixed at 2.60% | Starting from 1.XX% |
| Downpayment | 20% (Via CPF, up to $2,000 in cash) | 25% (5% cash required) |
| Porting to lower interest rate packages | No | Yes. Once contract period is over |
| Early capital repayment | No penalty | Depending on package terms. E.g. Usually no early repayment allowed within commitment period |
| Loan cap (CTV) | Up to 75% | Up to 75% |
| Use of CPF for monthly instalment | Yes | Yes |
| Orh-Gong (Late repayment penalty) | Almost unheard of | Yes. $80 onwards. |
| Shoot lawyer letter | Very unlikely | Can check letterbox after missing 5-6 payments |
Why many buyers eventually choose bank loans
1. Bank loans = Lower Interest Rates = Huge Savings
When choosing between a HDB loan or bank loan many would prioritise consider the amount of cost savings. Cost savings are exactly the main advantage of taking a bank loan.
HDB loans are fixed at 2.6%. Bank loans are often significantly lower, reaching a low 1.5% even in normal market conditions.
Even a 0.5% to 1% difference can mean:
• Tens of thousands saved over time
• Lower monthly instalments
• Faster principal repayment
Still unsure? Imagine the following loan details: You take a loan of $375,000. With a tenure of 25 years.
Let’s see how much you can save by choosing a bank loan over HDB loan.
You save on 6 months of payments just by choosing a bank loan.
Over 36 months, you would have amassed substantial interest savings of $9,793.
Think about it, that’s essentially 6 months of your monthly instalment amount.
On top of that, you would have paid off a significant portion of your principal amount as compared to a HDB loan. It’s no wonder that so many buyers end up choosing a bank loan instead.
2. Bank loans provide better wealth strategy
Whether HDB loan or bank loan, a key principle in financing is to aim to pay back your loan principal instead of the interest accumulated.
With lower interest:
• More of your payment goes into paying down your loan principal, not interest
• You keep your options open
• You have the option to refinance later when your contract is up (refinancing is exactly like how you port your phone number to a new telco to enjoy perks and discounts)
A bank loan gives you better long-term wealth strategy.
This is something most first-time buyers overlook when deciding between a HDB loan and a bank loan. Many end up choosing the former because of the simplicity and convenience that comes with it. They don’t even consider the long-term prospects a bank loan can bring them,
However, the fact that YOU are reading this shows that you are not turned away by the intricacies of planning for your future. So don’t be afraid of considering a bank loan for the sake of cost savings and a better wealth strategy.
3. Bank loans let you ride on the correct tide
A common misconception in choosing a bank loan is that one will be subject to interest rate fluctuations.
That’s not entirely true:
• You can refinance to another bank that is offering a better package.
• You can switch packages using package benefits such as One Time Free Conversion when rates change.
“What if bank interest rates rise above HDB interest rates in the future”
is probably what many new homeowners are thinking when considering the low interest rates that bank loans provide.
Long story short, the risks can easily be mitigated with the right strategy. But hey, that’s a whole topic on its own. My time is precious you know!
So why do people still choose HDB loan?
1. HDB loans have lower cash downpayment
One of the key benefits people allude to when choosing between a HDB loan or a bank loan is the lower cash needed for your BTO downpayment.
Taking a HDB loan means:
• No need to fork out 5% cash upfront
• Almost everything can be paid using CPF
This is a big deal for many young couples.
IS THIS TRUE?
HDB Loan
BTO Price: $500,000
Cash: $2,000
CPF: $123,000
Loan: $375,000
Total amount out of pocket: $125,000
Bank Loan
BTO Price: $500,000
Cash: $25,000
CPF: $100,000
Loan: $375,000
Total amount out of pocket: $125,000
Your amount out of pocket is the same for HDB loan and Bank loan.
Let’s be real. Whether cash or CPF, they both come out of your pocket and they both have opportunity costs. It’s a matter of priority where you prefer to draw your cash from.
2. HDB loans are a safety net
Every couple starts out with a concrete long-term plan the moment they start choosing between a hdb loan or bank loan. However, sometimes life doesn’t go according to plan.
If things go wrong:
• HDB is more lenient.
• It is easier to negotiate repayment terms when in default.
• But HDB forces you to use most of your CPF
Yes, nobody buys a house thinking to fail. But as one might say–if you fail to plan, you plan to fail. HDB makes things easy for the non-planners. If you’re falling behind on payments, you could simply hope for your big break one day and pay it back in due time.
The downside though, is that HDB dictates you must retain only a maximum of $20,000 in your Ordinary Account (OA). All remainder in your account must be used to finance your new house. This could be risky on a rainy day.
Leave your CPF for rainy days
Bank loans allows you to plan for a rainy day. It does not dictate a need to wipe out CPF OA Balances when applying for a loan. This means that you can opt to retain any preferred CPF OA savings to buffer for a rainy day.
If taking bank loans, I recommend that you set aside 12-24 times of Instalment amount in your CPF OA account as a buffer for rainy days.
E.g in event of unemployment or self-employed so that the Monthly instalment may still auto-deduct from your CPF OA balances.
3. HDB loans are stable
Yes it is true that HDB loans are the premium product with a higher price. But with that premium price, it comes the stability and predictability. HDB interest rates are essentially fixed at 2.6%.
What this entails for you is:
• No surprises for the future.
• Allows you to plan your future finances.
But how much is the premium for stability? Imagine the following loan details: Let’s say you take a loan of $375,000. With a tenure of 25 years.
You are paying $33,542 for stability.
This is all while assuming a cautious estimate of 2.0% interest rate for bank loans.
Is it worth it? It’s up to you to decide.
Some really value the stability and predictability that HDB loans bring over the monetary benefits of bank loans. Are you one of them?
So... which one should YOU choose?
Choose Bank Loan if:
• You can afford the 5% cash
• You want to save on interest
• You are financially disciplined
• You are thinking long-term
Choose HDB Loan if:
• You are tight on cash
• You want a peace of mind
• You prefer stability over optimisation
Need help finding the right bank loan?
Let us find the tailored solution for your needs, at no cost to you!
Here’s my final advice
Most Singaporeans focus on:
Can I afford the monthly payment?
But the smarter question is:
How much interest am I paying over time?
This is where the real difference between choosing a HDB loan or Bank Loan lies.