Loans are like those grains of rice that ants collect for their winter livelihood, just like ants put in a lot of hard work and dedication for collecting their food to spend their winters with ease, similarly, we take the loan to spend our lives in our own home.
Home is our necessity and loan is the path to our home. We can only reach our destination when we start walking on the path taking us to it, and a loan is a path to own our satisfying and comfortable home.
However, before taking any path for reaching our destination, we need to have a piece of knowledge about all the possible paths leading to our destination and all the possible situations which we may need to go through while walking through those paths so that we can analyze and select the best one amongst them, to make our journey beautiful.
So, here is the roadmap with a guide to both HDB Loan and Bank Loan, the main home loans you can opt for buying your home.
What is HDB Home Loans all about?
As the name suggests, an HDB loan is a home loan issued to the borrowers buying the HDB flats. HDB Home Loans are the concessionary loans that are a provision for Singaporeans.
When you opt for a home loan, you have to keep these points in your mind:
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Your property will be taken as collateral for the loan you have opted for.
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The loan will be disbursed after you make the downpayment, or we can say when you pay the remaining purchase price to the seller of your home.
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You will be charged with interest from the first disbursement of your loan.
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The amount will be granted to you based on the eligibility criteria.
Eligibility for a Home Loan:
Prospective borrowers of the HDB and the bank's home loans will have to match their eligibility criteria. The eligibility criteria will include the following parameters:
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Loan quantum
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Minimum and maximum age of the buyer
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Minimum monthly income of the borrower
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His or her residency status
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The borrower will need to fulfill the loan rules of the Monetary Authority of Singapore’s property
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The borrower has to go through the internal credit requirements of the HDB, whichever institute he or she is opting for the loan.
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Borrowers who are self-employed or do not have a regular income must demonstrate their ability to pay the monthly installments for their loan repayment.
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A borrower opting for HDB home loans has to apply and fulfill extra eligibility of the HDB Loan Eligibility Letter.
Now, you might be thinking about what HDB Loan Eligibility Letter is, so let us talk about it.
HDB Loan Eligibility Letter
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HDB Loan Eligibility Letter (HLE) is basically a process or method to find out if you, the borrower, are eligible for an HDB loan or not, and what is the maximum amount you can borrow from HDB Loans.
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HLE provides an overview to the borrower about the amount of money he or she can borrow, the monthly repayments, the amount of cash he or she may need during the process, and other terms and conditions.
Key Points Related to HDB Loans and Bank Loans
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Matters of Downpayments
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The HDB loans allow the borrower to only fork out a smaller amount of cash from their savings for the downpayment of their home.
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HDB has a maximum Loan-to-Value (LTV) ratio of 90% for its borrowers.
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90% of LTV gives an edge to the borrowers to borrow up to 90% of their home's value or price, whichever is lower.
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The borrower just has to make a downpayment of 10% from their side, which you can arrange from the combination of cash that you have or from your CPF OA savings.
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On the other hand, the banks provide an LTV ratio of only 75% and the rest 25% has to be arranged and paid by the borrower as a downpayment.
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Borrowers opting for the loan from bank loans will have to pay an extra 15% in downpayment as compared to an HDB loan.
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Area of Interest rates and monthly installments
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HDB loans have fixed interest rates at 0.1% above the prevailing CPF rate.
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Interest rates of bank loans are more variable, they depend on the market conditions.
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This variation of interest rates is also applicable to fixed-rate home loans, after a lock-in period of 2 to 5 years they start following the floating rate.
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The current interest rate for an HDB home loan is 2.6%.
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Income cap
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HDB loans have tight eligibility criteria, which includes the income ceiling criteria also.
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The borrower with his or her gross monthly household income of more than S$14,000 is not eligible for HDB Loans.
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Borrowers with high gross monthly income will find bank loans in their favor because bank loans do not have any criteria for an income cap.
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Refinancing for Loan
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Even after getting the 90% LTV, you can refinance your HDB loan into a bank loan, with the approval of the bank.
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However, a bank loan cannot be refinanced into an HDB loan.
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Tenure of Loan
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The loan tenure of HDB loans for HDB flats is capped at 25years.
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Bank loans have a loan tenure of a maximum of 30 years.
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Having a longer tenure helps the borrowers to spread out and lower their monthly repayments.
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Scheme of Early Repayment of Loan
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HDB loans do not have an early repayment penalty, unlike bank loans.
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The bank charges a prepayment fee if the repayment of the loan is done within the lock-in period.
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The banks charge early repayment fees because banks earn interest money from your loan, which will be cut short.
Restrictions of HBD Loans
We have talked about the path and its eligibility criteria, so now that you can decide which path you really want to take to your destination, and if you have selected the path then it is the right time to know about the hurdles that you may face while walking through that path.
Knowing about the hurdles of the path won't remove them but it will definitely help you to be prepared for them.
So, let us explore the restrictions of the HDB Loans:
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It is only applicable to the borrowers who are buying HDB flats.
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If there is more than one buyer of the house then at least one of the buyers must be a Singapore citizen to take the facilities of HDB Loans.
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The monthly income of the borrower must not exceed $14,000 and $21,000 for those who have extended families.
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The buyer having any private residence either in Singapore or anywhere overseas is not applicable for HDB Loans.
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The borrower should not have opted for more than two previous HDB loans.
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Under the Single Singapore Citizen (SSC) Scheme, a borrower who is singles and is buying a 5-room or smaller resale flat or 2-room new flat in a non-mature estate should not have a monthly income exceeding $7,000.
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Within 30 months before applying for the loan application, the borrower must not have any disposed of private residential property.
So, after analyzing both the main paths to reaching your destination called HOME you have to now decide which path to take.