#Housing101 : Singapore edition

In November 2022, CNA reported that major banks in Singapore like DBS, OCBC and UOB had raised their fixed home loan interest rates, reaching up to 4.5%. This interest rate hike is in tandem with Singapore’s core inflation rate, rising to 5.3% in September.

With such high interest rates on bank mortgages, you may be wondering about what options you have to finance your house purchase. In this article, we’ll go through some key things to know about home loans in Singapore and what factors you should consider with each option.
 

HDB Loan vs Bank Loan

There are two main categories of home loans available when buying a property in Singapore. HDB Loan is a concessionary home loan provided by the Housing Development Board (HDB) to help make home ownership accessible and affordable for Singaporeans. Bank mortgage loans are loans offered by commercial banks such as DBS, OCBC, and UOB. HDB loans can only be used for public housing (i.e. HDB), while bank loans can be used for both public and private properties.
 

Differences between HDB Loan and Bank Loan

To qualify for a HDB loan, at least one applicant needs to be a Singaporean, and there are income criteria to be met as well. On the other hand, bank loans are more flexible and have fewer restrictions.

Besides the eligibility requirements, one of the main differences between HDB and bank loans are their interest rates.

Fixed rate home loan

Like the term suggests, a fixed rate home loan offers a fixed interest rate throughout the term of the loan. This means that monthly mortgage payments tend to be stable throughout the repayment term. However, if interest rates were to fall, the borrower won’t be able to benefit from the lower rates.

HDB loan has a fixed interest rate of 2.6%. This rate is pegged at 0.1% higher than the prevailing CPF-Ordinary Account interest rate which has been at 2.5% since 1999. Some bank loans offer fixed rates as well.

Floating rate loan

Most bank loans operate on a floating rate, where the interest rate on the loan is tied to a benchmark rate.

You may have come across the terms “SIBOR” and “SORA” in reference to floating rate home loans. In essence, SIBOR (Singapore Interbank Offered Rate), SOR (Swap Offer Rate) and SORA (Singapore Overnight Rate Average) are benchmark interest rates that reflect the cost of borrowing unsecured funds in the Singapore interbank market. Different home loan packages may refer to different benchmarks, which in turn affect the mortgage interest rates. Take note that while SIBOR is still widely used, SOR and SIBOR will eventually be phased out in favour of SORA, which offers greater stability.

Because interest rates may fluctuate depending on the market conditions, the monthly repayments will vary over time. This means that interest charges may be lower if interest rates are low, which historically has been the case for bank loans in the last decade. Interest rates for bank mortgage loans have typically been below 2%, compared to HDB’s 2.6%. However, as we have seen recently, it is possible that bank mortgage interest rates can rise to rates as high as 4.5% depending on market conditions.

What to consider when choosing between HDB and Bank Loans

When deciding between a HDB loan or a bank loan, there are more factors than simply the interest rate to take into account.

A HDB loan allows you to pay the 20% down payment using CPF. However, a bank loan requires you to pay at least 5% in cash, and the remaining 20% can be paid using CPF or cash. Depending on your cashflow and CPF balance, you may also prefer the Loan-to-Value (LTV) limit of HDB loans which allows you to borrow up to 80% of the property’s value, compared to the 75% LTV limit of bank loans.

HDB loan repayments are also more consistent due to the fixed interest rates, which means your monthly payments will be more predictable. Bank loans on the other hand may have varying monthly repayment amounts as the fixed rates offered are only valid for 2 to 3 years. Bank loans also tend to be stricter with their repayment terms—banks may charge a penalty if you make early repayments, which is not the case for HDB loans.

That said, the eligibility criteria is much narrower for HDB loans—it is only eligible for HDB flats, and there are citizenship and income criteria for borrowers. If you are looking at private property, a bank loan would be your only option.

Repricing or refinancing your existing home loan

In light of rising mortgage rates, you may want to consider repricing or refinancing your existing home loans if you are able to find better rates and terms. Refinancing simply means switching your current home loan to a new one under a different bank or financial institution, while repricing refers to switching between different loan packages within the same institution. Currently it is only possible to switch from a HDB loan to a bank loan, but not the other way round.

Refinancing can save you hundreds to thousands of dollars in interest costs, but remember to calculate the legal and administrative costs that come with refinancing to ensure that you would still be saving money at the end of the process.

Should you prioritise paying off your mortgage first or investing first?

Given the rising mortgage rates, you may be wondering if it would be more prudent to prioritise paying off your mortgage first before putting your resources towards investment.

The answer would depend on your financial goals—but generally, if your main concern is with interest rates and saving costs, then it may make sense to focus on paying off your mortgage if the interest rate exceeds the potential returns from your investments. But if the potential returns from your investments are projected to be higher than your mortgage interest rate, then you may not have to rush your mortgage payments.

Whether you want to finish your mortgage payments as soon as possible in order to be debt-free, or focus on more aggressive investing to grow your wealth would depend on your circumstances and goals. You can consider reaching out to a financial advisor to see which course of action would be most suitable for you.

Don’t forget about mortgage and home insurance

Both home and mortgage insurance are important to protect yourself and your home from financial loss in the event of unexpected disaster, job loss or illness. Home insurance can cover the cost of your personal effects in the event of a house fire or theft. Mortgage insurance on the other hand can help protect you and your family from financial loss if you are unable to make your mortgage payments due to unexpected illness or job loss. Remember to review your coverage regularly to ensure that it is updated with your current lifestyle and circumstances. If you need advice on what insurance plans would be most suitable for you, do reach out to our Financial Representatives to find out more.