How Many Oz Of Formula For A 6 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 January 1, 2003, people buying an HDB (Housing Development Board) flat must finance it with either a HDB discount rate loan or a HDB market rate loan. But since then, the HDB market rate loan has been replaced by a home mortgage from financial institutions, according to the Monetary Authority of Singapore.

HDB concessional loan

Compared to a home loan from a financial institution, an HDB loan has stricter eligibility requirements. Most of them are covered below.

Eligibility Criteria:

  • Only for HDB flats (resale or direct purchase from HDB)
  • At least one buyer must be a Singapore citizen
  • Monthly gross income cannot exceed $10,000 (or $15,000 for extended families)
  • The maximum income for a DBSS apartment is $8,000 (or $10,000 for extended families)
  • Applicants under the Singapore Single Citizen (SSC) scheme have an income ceiling of $5,000
  • Must not own a private residence (Singapore or overseas) including HUDC or management housing association
  • Must not have sold a private property within 30 months or previously taken out a HDB loan
  • Must not have previously received a HDB loan within 30 months
  • Must not have taken out more than two previous HDB loans
  • Must no longer own market/department stalls or commercial/industrial property (unless you are self-employed, have no other source of income and have only one market/department stall or commercial/industrial property)

From July 2013, HDB loans will not be granted for flats with a lease period of less than 20 years. In addition, the loan approval and period for apartments with a 20-59 year lease are subject to certain conditions.

Given the many limitations of the HDB loan, why do Singaporeans still want to take it? In the following sections, we will discuss the advantages of this loan in more detail.

1. Higher CPF (Central Provident Fund) withdrawal limit

When financing with a bank loan, the CPF regular account withdrawal limit is up to 100% of the valuation limit (VL), whichever is lower than the purchase price or the value at the time of purchase. If the loan is still outstanding when this limit is exceeded, the housing withdrawal limit can be increased to 120% of VL, provided that half (full) of the applicable minimum amount is set aside for borrowers under 55 years of age (55 and above). This housing withdrawal limit varies depending on the purchase date of the apartment, for purchases made since 2008 it is 120%.

However, with a HDB concessional loan, you can enjoy a higher withdrawal limit.

When you buy directly from HDB, there is no limit on how much you can save in the regular account you use.

For the resale of HDB flats, there is no limit to the amount of savings that can be used in the regular account once you have set aside half of the applicable minimum amount.

However, since July 2013, for apartments with a 30-59 year lease, the use of the CPF fund is only allowed if the remainder of the lease covers the buyer until at least 80 years of age. For such apartments, the payout limit is calculated based on the formula below. :

Withdrawal limit

= (Remaining apartment or property rental agreement, if the youngest owner is 55 years old / Apartment or property rental agreement at the place of purchase) x VL

For example, at the place of purchase, the buyer is 38 years old and the lease contract is 40 years old. If the buyer turns 55, the lease will remain for 23 years. Therefore

Withdrawal limit = 23/ 40 x VL

Table 1 further illustrates what VL is.

Table 1: VL

Apartment A

Purchase price (S$) = 400,000

Valuation (S$) = 350,000

VL (S$) = 350,000

Apartment B

Purchase price (S$) = 370,000

Valuation (S$) = 420,000

VL (S$) = 370,000

In the case of apartments with leases of less than 30 years, the use of the CPF fund is prohibited. In other words, buyers want to fork out for cash down payments, monthly loan repayments, stamp duty and other miscellaneous charges.

2. No cash component required for deposit

The main advantage of an HDB loan is that you don’t have to pay any part of the down payment in cash. You are allowed to use your CPF (Central Provident Fund) regular account balance to pay it off in full.

In the case of a bank loan, you must pay at least 5% of the value limit (VL) in cash. If the term of the loan exceeds 30 years or exceeds the age of 65, the minimum amount increases to 10%.

3. Higher loan amount

For the first HDB concessional loan you take out, the loan amount is as much as 90% VL. On the other hand, for bank loans, the amount is capped at 80% of the LTV (loan-to-value ratio). It drops to 60% if the term of the loan exceeds 30 years or if you are over 65 years of age.

The new regulations, which came into effect on 12 January 2013, stipulate that the mortgage servicing ratio (MSR) for personal loans cannot exceed 30% of the borrower’s gross monthly income and 35% for HDB loans.

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

For example, for a 30-year loan at 80% for an HDB flat of S$800,000 at an interest rate of 1.5% per annum, the monthly repayment amount is S$1,932.67. In order to get a

  • HDB Loan: Monthly gross income ≥ S$5,521.92
  • Personal loan: Monthly gross income ≥ S$6,442.24

Therefore, if your income is below S$6,442.24, you are not eligible for an 80% LTV personal loan. If you extend the term of the loan, the current rules require that you can only take up to 60% of the LTV.

Therefore, the HDB loan allows for a larger loan amount.

4. HDB is more lenient

As a government agency whose primary objective is to provide affordable, quality housing and encourage home ownership, the HDB tends to be more tolerant of delinquent borrowers.

But with a loan from a financial institution, you are always bound to pay the prescribed amount every month, even if your salary has been reduced.

In addition, HDB usually provides a deferral of the monthly installment if you are in financial difficulties. Banks, on the other hand, are likely to be on your heels if you delay payment by even a day!

5. No fine is applied for partial or full repayment of the loan

It should be noted that HDB imposes zero penalty for partial or full repayment of its loan.

However, most mortgage loans from financial institutions typically have a lock-in period (aka commitment period) of 3-5 years. During this period, any repayment higher than the pre-agreed amount is subject to a penalty – usually up to 1.5% of the repayment amount. Financial institutions benefit from the interest on the loan, partial or full repayment of the loan means a loss of interest income. Thus, the fine helps to compensate for this loss.

6. Interest rate stability

Because the HDB loan interest rate adjustment is quarterly along with the CPF interest rate change which has been the same for over 10 years. The interest rate has also remained unchanged. An HDB loan thus offers relatively more stability than even a fixed rate mortgage, which has a fixed interest rate for only 3-5 years. This is not to say that HDB interest rates have not fluctuated. For example, in the 1990s, interest rates showed greater volatility.

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