HDB loan vs Bank loan - Why I will still continue with my HDB loan

Tuesday, August 01, 2017 Jes Finance , HDB 2 Comments

Why I went with HDB loan in the first place?

1. Lesser cash upfront

For the purchase of HDB flat, 20% of the amount is needed as the down payment. If you have sufficient CPF funds and with HDB loan, you can pay this 20% fully with your CPF-OA account. For bank loan, you must at least pay 5% of the down payment in cash. For cash strapped couples like us, especially when you have to pay for wedding banquet and renovation, HDB loan is a no brainer. After all, you could always change to bank loan at any time but once you take up bank loan, there is no turning back until the next property. 

2. Long duration for house loan

I intend to stretch out my loan to the maximum 30 years. I have no intention of early repayment, mainly because I think I have more use for my cash. I understand that people like to repay them earlier so as to incur less interests but my personal choice is to invest in STI ETF, which yields higher returns. Bear in mind that you may also incur some penalty if you repay some bank loans too early while HDB loan has no such issues.

3. "Fixed" rate for the next 30 years

Yes, I know from 2007 onwards, bank interest rates have been much lower than HDB loan. Current rates are around 1.8% bank loan vs 2.6% HDB loan interest rates. However, I know for sure it won't be this case for the next 30 years. HDB interest is more "fixed" as they have not changed their rates since 2000. For people who intend to repay their loans within 10 years, it would be a good choice but not for me. It may also be good for people who intend to sell the HDB flat within the decade.

I used the average of 3months SIBOR + 1.25% to get the bank interest rates though different banks may offer different rates.

Why I will still continue with HDB loan?

It is because HDB is more forgiving and lenient.

Now that I am trying my own start up at SnackFirst, money is not consistent anymore. There will be times people will be retrenched or have difficult financial situations and banks are not going to be so accommodating to you. There are late repayment penalties too but HDB has financial assistance schemes if your CPF has indeed zero cash. 

All in all, it just does not seem worth it to save this $100+ per month. In the long run, what if bank loan interest rate becomes more than HDB loan? I will definitely regret changing but unable to change back anymore. Looking at the historical data, it seems HDB loan usually gives lower rate than bank loans. The amount is too big to make an impulse change and I will just treat the $100+ as insurance money against future financial issues. 

I still have another 27 years to wait and see.