Thursday, February 28, 2013

HDB loans versus bank financing

Banks offer lower interest rates for now, and have different limits and criteria from Housing Board
The Sunday Times - February 24, 2013

More than 83 per cent of residents in Singapore live in a Housing Board flat. Last year, more than 59,000 residents became proud owners of new and resale HDB flats.

Two-thirds of these home buyers also took a direct loan from HDB at the concessionary rate of 2.6 per cent.

However, in the current low interest rate environment, home buyers are increasingly exploring other financing options.

They should take into account the fact that the HDB concessionary rate is pegged to that of the Central Provident Fund (CPF) Ordinary Account, which has a minimum legislated rate of 2.5 per cent. This is higher than what most banks are offering for fixed rate mortgages.

Hence, buyers have the option of considering HDB flat financing from financial institutions such as banks, alongside the HDB's concessionary loan package to determine the financing solution that best suits their needs.

Note that there is generally a difference between the maximum loan amounts granted by banks and by HDB. This is due to differences in the limits placed on the maximum percentage of purchase price or valuation permitted to be loaned and also limits on the percentage of income usable for loan servicing.

However, there is no need for home buyers to be caught up in the technicalities. They can approach any financier for a home loan eligibility or approval-in-principle evaluation to proceed with their selected units.

In addition to alternative financing options, home buyers should understand how the property guidelines introduced within the last few years affect them and the resources that are available to them when they purchase a new or resale flat.

Concessionary loan exclusions

Have you already taken two HDB concessionary loans? Are you purchasing your HDB flat as a permanent resident family nucleus? If you are buying a Build-To-Order (BTO) or resale HDB flat, does your household income exceed $10,000 a month? Do you own and run any market/hawker stall or commercial/industrial property? HDB's concessionary loan might not be available to everyone. If you do not fall within its qualifying criteria, bank financing would be your best option. More information on the HDB concessionary loan is available online.

CPF housing grants

CPF housing grants are available for first-timer citizen households purchasing a resale flat from the open market. The grant starts from $30,000 for strictly Singaporean households and could potentially rise to $40,000 if your parents are living with you in the flat, in the same town or within a 2km radius from you.

An additional CPF housing grant is available for households with incomes of up to $5,000 on condition that applicants have been in continuous employment for the past 12 months.

All of these grants are applicable to the purchase itself and are valid should you choose to take up financing with a bank or with HDB.

Cash outlay

When financing your BTO/resale flat purchase with a bank, you need to set aside an initial cash down payment starting from 5 per cent. This will not be required when taking up HDB financing. Can you afford this initial cash outlay? If not, could you be overstretching yourself in this flat purchase? As this property purchase is likely to be the single biggest ticket item you will ever take on, it is important not to be financially overburdened by the commitments of servicing this property purchase.

CPF reserves

It is a requirement, when financing your flat with HDB, to fully utilise the balance in your Ordinary Account towards the initial down payment. This is a condition on top of the 10 per cent down payment required for HDB financing.

For bank financing, there is no requirement to fully utilise your CPF Ordinary Account balance. If you take out an 80 per cent loan-to-value bank loan, (where you borrow 80 per cent of the valuation of the flat) the initial outlays required are the 5 per cent cash down payment and the remaining 15 per cent which can be paid from CPF.

We recommend keeping a balance of CPF Or-dinary Account reserves to act as a buffer of emergency funds to mitigate against a loss of repayment capability.

Financing preferences

There are many financing options out there. If low rates are your thing, floating rate packages, which are generally priced most affordably, will ensure the leanest of loan bills.

Currently, floating rates can range from 1.2 per cent to 1.5 per cent. If stability is what you seek, fixed rates will mean fixed loan repayments but there is generally a lock-in period, with a fee for early pre-payments.

Fixed rates will be higher than the floating rates, with rates up to 1.78 per cent, but they are currently still below the HDB's concessionary rate of 2.6 per cent.

Besides straightforward loan options, there are now loan packages which blur the traditional lines between fixed and floating rates.

For instance, there are fixed rate loan packages that allow you to decide, halfway through the fixed rate period, whether to switch to floating rates or continue with the same fixed rates. Such loans allow you a second decision point at a later date to re-evaluate your loan needs.

One such product is DBS Home Loan 2+2, which is a fixed rate programme that allows home buyers to switch to floating rates after two years or continue to enjoy the same fixed rates for another two years.

Other unique products involve floating rate loans that come with a cap on maximum interest chargeable, but offer flexibility such as early repayment and the opportunity to reap interest savings when rates are low.

Having an interest rate cap in place keeps your actual interest expense from spiralling out of control in a rising interest rate environment.

In addition to HDB, there are many banks offering HDB loans. It would be in your interest to make a few comparisons before deciding on the one that best fits your financial goals.

The writer is managing director and head of deposits and secured lending at DBS Bank.

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C

Senior Sales Director
DTZ Property Network Pte Ltd (L3007960A)

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