Whether you are looking to purchase a Housing Development Board (HDB) flat or a private property, the first steps are similar: after deciding on the property that you would like to purchase, you now have to think about how to finance it. While it is true that HDB loans and bank loans cover up to 90% and 75% of the property’s value respectively, there’s still the initial downpayment , especially the cash component, that people tend to worry about.
This article will cover…
What types of loans are available for HDBs and private property purchases?
What are the minimum down payment amounts required?
Should I only pay the minimum amount of down payment?
Can I use my CPF?
If you are buying an HDB flat, you can choose to take a loan directly from HDB or, if you prefer, a bank of your choosing. On the other hand, if you are looking to buy a private property (such as condominiums and Executive Condominiums), your only choice is to get a loan from a bank.
Now, with that out of the way, let’s examine both types of loans on the market.
HDB Housing Loan (for HDB Properties Only)
HDB provides a housing loan to eligible flat buyers at a concessionary interest rate, currently pegged at 2.6%, or 0.1% above the interest rate of Central Provident Fund’s Ordinary Account (CPF OA).
Even though this looks higher than what most banks offer on paper, keep in mind that HDB loans allow you to have a loan-to-value (LTV) ratio of up to 90%, compared to just 75% from private banks. Not only does this mean that you can potentially borrow more for the same property, you also need not pay as much downpayment, making this option far more affordable for many.
Bank Loan (for All Property Types)
The interest rate of the bank loan depends on the bank itself, but they are generally lower than their HDB counterpart. This means that you could potentially pay significantly less than if you took up an HDB loan in the long run. With that said, the interest rate of bank loans fluctuates depending on market conditions. While it has historically not risen higher than HDB loan rates, it is prudent to keep this in mind.
There are several types of bank loan packages you can choose from.
Fixed Rate Bank Loans
For one, there are fixed rate bank loans. A fixed rate home loan applies the same agreed-upon rate throughout the contractual period. For example, if you signed up for a five-year fixed rate package at 1.8% per annum, the interest rate for your loan will remain 1.8% for five years before it reverts to a floating rate.
Floating Rate Bank Loans
Then there are floating rate bank loans, which feature rates that vary upwards and/or downwards along a pre-agreed base rate, such as the Singapore Interbank Offered Rate (SIBOR).
SIBOR Bank Loans
SIBOR-related packages, in particular, are especially popular because it is published every day on the Association of Banks in Singapore’s website, making it highly transparent. Also, since SIBOR is determined by the interaction of several independent banks, it is not possible for any single bank to influence the rate and ‘spoil the market’ for everybody else.
SIBOR-pegged interest rates fluctuate with the market, but because SIBOR is a published rate, such bank loans are considered more transparent than others that are pegged to rates determined by the banks themselves (like fixed deposit and/or board rates).
Read more about fixed versus floating rate bank loans here.
What is the Minimum Downpayment Required?
Since HDB loans allow you to borrow up to 90% of the property value, this means that the minimum down payment is 10%. The maximum loan size could potentially be smaller, too, since flat buyers are required to use up most of their Ordinary Account (OA) savings (leaving up to S$20,000 in each account) before they can obtain a home loan.
Meanwhile, bank loans only allow you to borrow up to 75% of the property value or purchase price, whichever is lower.
HDB Flat Example:
Let’s say you are buying an HDB resale flat at $500,000. If you took a 90% loan from HDB, the downpayment is going to be 10%, or $50,000. If you went for a bank loan instead and took 75% in loans, then your downpayment is going to be $125,000, of which $25,000 must be paid in cash.
Based on this example, it is clear that the upfront downpayment cost for an HDB loan is a lot lower.
Private Property Example:
Now, let’s say you are buying a condominium valued at $1 million, and you’re paying $1.2 million. First of all, you can only apply for a bank loan. Next, the valuation of $1 million will be used to calculate how much you can loan (because it is less than the buying price of $1.2 million).
Assuming you take the maximum 75% loan, your downpayment is going to be $250,000 + the $200,000 cash over valuation (CoV). Even though up to $200,000 can be paid with CPF, most people don’t have that amount in their OA savings.
Note: You'll Also Need to Pay Stamp Duties
Do note that right about when you decide to purchase the property—that is, after you exercise your option to purchase (resale condo), sign your sales & purchase agreement (new condo) or sign your agreement of lease (HDB)—you'll also need to pay your Buyer's Stamp Duty (BSD) and Additional Buyer's Stamp Duty (ABSD; if applicable).
How much these duties will cost depends on the price of your property. Read more about the Buyer's Stamp Duty and Additional Buyer's Stamp Duty.
Is it Wise to Only Pay the Minimum Downpayment?
In other words, should you borrow as much as HDB or the bank allows you to?
If you have limited amounts of money on hand, sticking with the minimum down payment means borrowing more to finance the property. However, keep in mind that the more you borrow, the more you have to return — with interest — by the end of your term period. Even if the interest rate remains the same, the amount paid as interest payment does add up eventually.
Conversely, if you can afford to put down more as down payment, this means borrowing less and repaying less as interest payments. It may seem counterintuitive at first, since you are paying more up front; however, by the end of your repayment term, you may find that a bigger down payment does mean a smaller financial footprint.
Different approaches work for different people – if you need help figuring out a mortgage arrangement to suit your financial situation, SG Homeprogression Home Advisors can help.
Can I Use My CPF for the Downpayment?
It doesn’t matter whether you are purchasing an HDB flat or a private property. The good news is that your CPF OA savings can be used to assist with the down payment for both.
To put this into perspective, if you are buying a new flat directly from HDB that costs $400,000 and the minimum down payment amount is $40,000, all $40,000 of it can be covered by your savings in your CPF OA. If it is a resale HDB unit, a cash amount of $5,000 is required, but you can use your CPF OA for the rest.
Contrary to popular belief, you can indeed use your CPF OA savings to pay the down payment for your private property as well — provided you have enough.
There are some opportunity costs to emptying out your CPF savings for housing though. You can read about that here: How CPF Accrued Interests Can Affect Property Owner?
Have questions or doubts? I welcome all enquiries.