HDB loans versus bank financing

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#1
A useful article for those who are contemplating taking a bank loan instead of an HDB loan.

The Straits Times
www.straitstimes.com
Published on Feb 24, 2013
HDB loans versus bank financing

Banks offer lower interest rates for now, and have different limits and criteria from Housing Board

By Lui Su Kian

More than 83 per cent of residents in Singapore live in a Housing Board flat. Last year, more than 59,000 residents became proud owners of new and resale HDB flats.

Two-thirds of these home buyers also took a direct loan from HDB at the concessionary rate of 2.6 per cent.

However, in the current low interest rate environment, home buyers are increasingly exploring other financing options.

They should take into account the fact that the HDB concessionary rate is pegged to that of the Central Provident Fund (CPF) Ordinary Account, which has a minimum legislated rate of 2.5 per cent. This is higher than what most banks are offering for fixed rate mortgages.

Hence, buyers have the option of considering HDB flat financing from financial institutions such as banks, alongside the HDB's concessionary loan package to determine the financing solution that best suits their needs.

Note that there is generally a difference between the maximum loan amounts granted by banks and by HDB. This is due to differences in the limits placed on the maximum percentage of purchase price or valuation permitted to be loaned and also limits on the percentage of income usable for loan servicing.

However, there is no need for home buyers to be caught up in the technicalities. They can approach any financier for a home loan eligibility or approval-in-principle evaluation to proceed with their selected units.

In addition to alternative financing options, home buyers should understand how the property guidelines introduced within the last few years affect them and the resources that are available to them when they purchase a new or resale flat.

Concessionary loan exclusions

Have you already taken two HDB concessionary loans? Are you purchasing your HDB flat as a permanent resident family nucleus? If you are buying a Build-To-Order (BTO) or resale HDB flat, does your household income exceed $10,000 a month? Do you own and run any market/hawker stall or commercial/industrial property? HDB's concessionary loan might not be available to everyone. If you do not fall within its qualifying criteria, bank financing would be your best option. More information on the HDB concessionary loan is available online.

CPF housing grants

CPF housing grants are available for first-timer citizen households purchasing a resale flat from the open market. The grant starts from $30,000 for strictly Singaporean households and could potentially rise to $40,000 if your parents are living with you in the flat, in the same town or within a 2km radius from you.

An additional CPF housing grant is available for households with incomes of up to $5,000 on condition that applicants have been in continuous employment for the past 12 months.

All of these grants are applicable to the purchase itself and are valid should you choose to take up financing with a bank or with HDB.

Cash outlay

When financing your BTO/resale flat purchase with a bank, you need to set aside an initial cash down payment starting from 5 per cent. This will not be required when taking up HDB financing. Can you afford this initial cash outlay? If not, could you be overstretching yourself in this flat purchase? As this property purchase is likely to be the single biggest ticket item you will ever take on, it is important not to be financially overburdened by the commitments of servicing this property purchase.

CPF reserves

It is a requirement, when financing your flat with HDB, to fully utilise the balance in your Ordinary Account towards the initial down payment. This is a condition on top of the 10 per cent down payment required for HDB financing.

For bank financing, there is no requirement to fully utilise your CPF Ordinary Account balance. If you take out an 80 per cent loan-to-value bank loan, (where you borrow 80 per cent of the valuation of the flat) the initial outlays required are the 5 per cent cash down payment and the remaining 15 per cent which can be paid from CPF.

We recommend keeping a balance of CPF Or-dinary Account reserves to act as a buffer of emergency funds to mitigate against a loss of repayment capability.

Financing preferences

There are many financing options out there. If low rates are your thing, floating rate packages, which are generally priced most affordably, will ensure the leanest of loan bills.

Currently, floating rates can range from 1.2 per cent to 1.5 per cent. If stability is what you seek, fixed rates will mean fixed loan repayments but there is generally a lock-in period, with a fee for early pre-payments.

Fixed rates will be higher than the floating rates, with rates up to 1.78 per cent, but they are currently still below the HDB's concessionary rate of 2.6 per cent.

Besides straightforward loan options, there are now loan packages which blur the traditional lines between fixed and floating rates.

For instance, there are fixed rate loan packages that allow you to decide, halfway through the fixed rate period, whether to switch to floating rates or continue with the same fixed rates. Such loans allow you a second decision point at a later date to re-evaluate your loan needs.

One such product is DBS Home Loan 2+2, which is a fixed rate programme that allows home buyers to switch to floating rates after two years or continue to enjoy the same fixed rates for another two years.

Other unique products involve floating rate loans that come with a cap on maximum interest chargeable, but offer flexibility such as early repayment and the opportunity to reap interest savings when rates are low.

Having an interest rate cap in place keeps your actual interest expense from spiralling out of control in a rising interest rate environment.

In addition to HDB, there are many banks offering HDB loans. It would be in your interest to make a few comparisons before deciding on the one that best fits your financial goals.

The writer is managing director and head of deposits and secured lending at DBS Bank.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
why people don't mind to pay 2.6% everybody knows this money is from CPF so we are paying ourselves.

Also with Bank loan if you cannot pay they will chase you out and foreclose. HDB loan you cannot pay no matter what they won't chase you out.

If they do chase you out and you living in the streets in the void deck where your neighbors can see it look bad for the MP that there are homeless in the constituency and come election it's definitely going to affect.
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#3
> HDB loan you cannot pay no matter what they won't chase you out

I dont think this is true. There are cases where people have been asked to downgrade.

My regret on HDB was not taking the $50K grant for buying flat near my parents. :-(
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#4
complain MP no use.. have to facebook xiao lee liao... :O
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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#5
I was forced to take bank loan becos I could not qualify for hdb loan. I just hope in the future, I can somehow convert to hdb loan due to any dire circumstances.
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#6
Quote:I dont think this is true. There are cases where people have been asked to downgrade.

Downgrade yes but not leave you homeless. People remember SM Goh's promise a roof over every head so if there are homeless means somebody forgotten about this or not doing their job.

But If you go for bank financing it's all about money and it's all black and white they will just evict if you cannot pay.
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#7
(24-02-2013, 10:44 AM)sgd Wrote: why people don't mind to pay 2.6% everybody knows this money is from CPF so we are paying ourselves.

Can't really follow your logic. Isn't the 2.6% interest paid from your CPF account to HDB?

My HDB flat is fully paid. During the loan paying period, the HDB loan cost 2.6% whereas a bank loan cost much less.
On hindsight, if I had opted for a bank loan, I would have paid less interest in total.
I think I am the odd one out who regretted taking HDB loan!
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#8
(24-02-2013, 03:49 PM)sgd Wrote:
Quote:I dont think this is true. There are cases where people have been asked to downgrade.

Downgrade yes but not leave you homeless. People remember SM Goh's promise a roof over every head so if there are homeless means somebody forgotten about this or not doing their job.

But If you go for bank financing it's all about money and it's all black and white they will just evict if you cannot pay.

I don't think you can trust the government on this. The staff in HDB are follow by the book type. SM Goh says this just to pull in more votes. In reality, it doesn't happen.
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#9
(24-02-2013, 08:58 PM)Some-one Wrote: I don't think you can trust the government on this. The staff in HDB are follow by the book type. SM Goh says this just to pull in more votes. In reality, it doesn't happen.

Do you work in HDB?

http://siewkumhong.blogspot.sg/2007/03/q...ruary.html
Quote:Mr Siew Kum Hong asked the Minister for National Development (a) how many HDB flat owners lost their flats due to failure in making mortgage or rental payments, in each year from 2002 to 2006; (b) of this number, how many applied to HDB to obtain alternative accommodation in each year and how many were rejected for each year; © what were the most common reasons for rejection; and (d) whether the fact that an applicant’s household includes dependants is a relevant factor in deciding such applications.

Mr Speaker: You have two minutes, Dr Maliki.

Dr Mohamad Maliki Bin Osman (for the Minister for National Development): Mr Speaker, Sir, from 2002 to 2006, 360 HDB households voluntarily surrendered their flats to HDB due to default in HDB mortgage loan payments. There were also 895 cases of mortgagee sale of HDB flats by banks, as I mentioned earlier. No tenant under the Public Rental Scheme was evicted due to rental arrears, although some have been advised to transfer to smaller rental flats to reduce their rent.

Of the 360 households who voluntarily surrendered their flats to HDB, 200 (56%) have been allocated rental flats while the rest found their own housing arrangements. Among the 895 households affected by HDB mortgagee sale action, 273 appealed to HDB for some form of help. Of these, 131 (48%) were offered a rental flat while another 13 (5%) who met credit assessment guidelines were provided a concessionary loan to purchase another flat.

http://www.hdb.gov.sg/fi10/fi10221p.nsf/...nt/AR0708/$file/STATISTICS%20AND%20CHARTS.pdf

In FY2007, the total no. of flats is 878,813. 360 out of 878813 is about 0.04%.
Total no. of HDB loans in 2006... hard to find...
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#10
Quote:I was forced to take bank loan becos I could not qualify for hdb loan. I just hope in the future, I can somehow convert to hdb loan due to any dire circumstances.

From my own personal experience, sometime when you tried everything and is beyond your ability like example HDB don't want to make an exception just go see your MP if your request is reasonable things can be work out.

Government operates on hierarchy, they may go by the book when dealing with us but within themselves all will work to please their superior because all want to get good reviews as it affects their increment bonuses and merit for any promotion later. And a MP will be higher in rank to any senior civil servant.

All these senior civil servant will want to maintain good relations in the event they end up working under an MP one day. So if the secretary of so and so MP wrote in to HDB to ask for a reasonable favor on behalf of his/her resident .... you get the picture. Big Grin

Of course if you go see MP and ask for things like a car or million dollar or ask them to pay credit card bill then they may feel insulted and tell you to go fly kite. But usually any issues or problems related to government that you cannot handle you can try to take it to your MP.
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