Should I take a HDB mortgage loan or a bank mortgage loan?
It depends on the available cash and CPF funds you have on hand, as well as your income.
For a first-time home buyer, you can technically get up to 90% loan-to-value from a HDB mortgage loan, provided that your age (or the age of the youngest buyer) and the remaining lease of the flat add up to at least 95. As for the remaining 10% of the valuation price, it can be paid off using your CPF, less the maximum $5000 in cash deposit you pay to the seller when you obtain the Option to Purchase (OTP) (maximum $1000) and when you exercise the OTP (maximum $4000).
On the other hand, a first-time home buyer can get up to 75% loan-to-value from a financial institution. For the remaining 25% of the valuation price, 5% must be paid in cash (mandatory) and 20% can be paid using CPF.
From the above, it is easy to see why a cash-strapped buyer might find a HDB loan more attractive, as you does not need to come up with minimum 5% mandatory cash outlay and 20% from your CPF funds.
However, there are some buyers which would benefit from taking a bank loan instead of a HDB loan, because of their lower interest rates in the current economic climate. Some banks are now offering fixed interest rates for HDB flats as low as 1.5% – 1.7% per annum, while HDB mortgage loan is forever pegged at 2.6%.
Below are two scenarios which explain how a bank loan might work in your favour when buying a HDB flat:
Scenario 1:
Mr and Mrs A are aged 25 and 23 respectively, buying a flat near Mrs A’s parents with 55 years remaining lease. Therefore, they will not be entitled to the maximum HDB loan of 90% of the property price or valuation, since Mrs A’s age and the remaining lease of the flat only add up to 78 and not 95.
Moreover, both Mr and Mrs A are self-employed, which means their CPF Ordinary Account funds are in fact quite negligible. This means they would have had to top up with cash anyway to supplement whatever their mortgage loan (either from HDB or a bank) cannot cover.
In this case, it makes sense for them to consider a bank loan instead of a HDB loan, since a HDB loan would not be able to cover them up to 90% of the property price or valuation anyway, because of their youth and the relatively older age of their flat. Their savings would come in the form of lower monthly mortgage payment in the years to come, which can add up to quite a tidy sum.
Scenario 2:
Miss B, aged 26, wants to buy a 25-year old or younger resale flat with her mother, with a budget of $300,000. She has about $130,000 in cash and $20,000 CPF savings at her disposal.
Technically, a HDB loan should have been able to cover 90% of the property price/valuation, which is $270,000 assuming that her flat is valued at $300,000.
However, after doing a Home Loan Eligibility (HLE) check with HDB, Miss B finds out that she can only get a maximum loan of $203,000 from HDB, because of her monthly income constraints. This means she would still need to come up with $97,000 in cash and/or CPF.
In this case, Miss B can consider taking a bank loan which has a lower interest rate than a HDB loan. This is because even if she only qualifies for a $150,000 mortgage loan from the bank, she is prepared and able to come up with the remaining $150,000 cash/CPF required to top up her bank loan shortfall.
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