Choosing between an HDB loan and a bank loan is one of the most important decisions you’ll make when financing your first home in Singapore. For many, buying their first home is an exciting milestone, but it can also be overwhelming, especially when it comes to figuring out how to fund such a major purchase.
In this guide, we’ll break down the key differences between HDB loans and bank loans in Singapore, including eligibility requirements, interest rates, down payments, and risks, so you can make a confident, well-informed decision on how to finance your home in the most affordable way possible.
What are the differences between an HDB loan and a bank loan?
Understanding how loans work is fairly simple. When you borrow money, you (the borrower) need to offer some form of guarantee that you’ll repay the debt.
For other types of loans such as personal or education loans, this will usually involve nominating a guarantor who will ensure you pay your loans back diligently, else they will have to do so on your behalf.
With HDB and bank home loans, your property acts as the collateral. This means that if you fail to repay the loan, the lender – whether it is HDB or a bank – can repossess and sell the property to recover the debt.
Although both loans have this common structure, they differ in terms, repayment options, and eligibility. Let’s take a look at how HDB loans and bank loans compare for homebuyers.
Interest rates
HDB loan:
As you can probably guess, a HDB loan is basically a loan from HDB, which can only be used for HDB flat purchases, both BTO and resale. HDB loans have a fixed interest rate tied to the CPF Ordinary Account (OA) interest rate + 0.1%, which results in a flat 2.6% interest rate. This has remained unchanged since 1999, providing long-term stability and predictability for homeowners.
Bank loan:
Bank loans offer more flexibility than HDB loans. While you can use them to finance HDB flat purchases, a bank loan is the only option if you are buying an executive condo or private condo. However, bank loans require you to pay at least 5% of the downpayment in cash. The rest can be covered by your CPF OA or cash.
Fixed‑rate packages
Fixed-rate loans are exactly what they sound like, where interest rates are locked in for a predetermined tenure, which is usually between 1 to 3 years, but can sometimes reach up to 5 years with select promotions. Once that period ends, your loan will generally transition into a floating-rate package, unless you decide to refinance to another fixed-rate package.
The main selling point of a fixed-rate loan is predictability, as you’ll know exactly how much you’ll pay each month.
Interestingly, it seems that most banks here in Singapore do not publish their fixed rate packages publicly anymore, and you’ll have to send in a request to a mortgage specialist, who will follow up with you on the available fixed rates.
Floating‑rate packages
A floating-rate loan comes with a variable interest rate that changes according to economic conditions. In Singapore, most floating-rate packages are linked to benchmarks like the Singapore Overnight Rate Average (SORA), which is updated daily. The rate is usually expressed as SORA + spread (e.g., SORA + 0.25%). This means your monthly instalments can go up or down depending on changes in the benchmark rate.
Floating rates are often initially lower than fixed rates, which means lower initial monthly repayments. However, floating rates are directly impacted by market fluctuations, so if interest rates increase, your monthly repayments will as well!
Some floating-rate packages even allow for early repayment without penalties, giving you more freedom to pay off your loan quicker if your financial situation improves.
Image credit: UOB
Which loan am I eligible for?
HDB loan eligibility
For HDB loans, eligibility is pretty straightforward. At least one applicant has to be a Singapore citizen, and your household must be under the gross monthly income cap, which is:
- $14,000 for families
- $21,000 for extended families
- $7,000 for singles buying under the Single Singapore Citizen (SSC) Scheme
In addition, you must not own or have any interest in any local or overseas private property, and you must not have taken two or more HDB housing loans previously.
Bank loan eligibility
Bank loans largely follow a different set of eligibility criteria. They are open to all (including PRs and foreigners), and there is no income cap. However, they assess applicants based on:
- Income and employment: You need to prove that you can repay your loan
- Credit score: Banks will check if you have any outstanding loans (including credit card debt), and assess whether you are financially responsible.
- Total Debt Servicing Ratio (TDSR): This is a measure that financial institutions like banks use to ensure you can comfortably manage your loan repayments. It is calculated by comparing your total monthly debt obligations against your gross monthly income, usually expressed as a percentage (typically 55%). The TDSR ensures you don’t take on more debt than you can handle.
What is the difference in loan tenure, down payment & lock-in period?
HDB loan:
- For HDB housing loans, the maximum loan tenure is 25 years
- No lock-in period, allowing you to pay off the loan early or switch to a bank loan without penalty
- Fixed interest rate and no lock-in period provide more stability and fewer surprises
Bank loan:
- Maximum tenure of 30 years. The loan tenure may be adjusted based on the borrower’s age and repayment ability
- Typically has a 1-3 year lock-in period. Early repayment or refinancing within this period may incur penalties
- Requires a 25% down payment, with at least 5% paid in cash. The rest can be covered by CPF OA or cash
- More flexible options with fixed or floating rates, but they come with risks like interest rate fluctuations
Bank loans offer you a longer tenure, with the duration affecting your loan eligibility. Remember that the main concern for banks is your ability to repay your loan. If you are, say, under 35 years old, you can essentially take out a full 30-year loan and have the full 75% LTV ratio applied to you. However, if you were 45 years old, the bank may not extend the full LTV ratio to you, or even the option of a full 30-year loan. HDB loans, on the other hand, have higher monthly payments but less interest overall, potentially requiring both CPF OA funds and cash out-of-pocket.
What is Loan‑to‑Value (LTV) Limit & Loan Quantum?
Image credit: Docomomo Singapore
You also need to be aware of how much you can actually borrow, which refers to your loan quantum. You may have heard of LTV, which stands for Loan-to-Value. This is the percentage of a property’s value or price that a bank or HDB is willing to finance through a loan.
For first-time homebuyers with no outstanding home loans, the LTV ratio is typically 75%. This means you can borrow up to 75% of your property’s purchase price or valuation.
It’s also important to note that several factors can affect your LTV ratio. For example, with bank loans, if the loan tenure exceeds 30 years or if the loan tenure plus the borrower’s age exceeds 65 years, the LTV ratio will be reduced. Plus, if you have a poor credit score (from outstanding credit card debt or other loans), your LTV ratio will likely be lower.
HDB loan or bank loan: which is better for me?
Ultimately, the decision depends on your risk appetite, financial goals, and comfort with fluctuating interest rates. If you value stability and peace of mind, an HDB loan may be the better choice for you. However, if you’re comfortable with some risk and have the flexibility to manage market changes, a bank loan could offer lower rates and better long-term savings.
HDB loans provide stability and are ideal if you want predictable monthly payments without worrying about market fluctuations. However, the interest rate is generally higher than what you might find with bank loans, especially when market rates are low.
Bank loans, on the other hand, offer flexibility and the potential for lower initial rates, but you’re exposed to interest rate changes. If you’re financially savvy and can manage rate fluctuations, a bank loan could save you money in the long run. It’s worth noting that during the pandemic years of 2021 to 2023, interest rates shot up significantly to over 4%.
Whichever option you decide upon, be sure to properly chart out your financial health and plan out your budget over the long term. And when in doubt, it wouldn’t hurt to consult a mortgage specialist or even a real estate agent to help you run through your numbers.
For more reads:
- HDBs that can pass off as condos
- Dual-key HDB flats: are they worth the investment?
- $880k Jalan Bahagia terrace that costs less than some HDB flats
Cover image adapted from: TheSmartLocal
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