Before January 1, 2003, people who buy an HDB (Housing Development Board) apartment have to finance it with an HDB Concessionary Rate Loan or an HDB Market Rate Loan. But since then, HDB’s market rate loan has been replaced by home mortgages from financial institutions, which are published by the Monetary Authority of Singapore.
HDB Concessional Rate Loan
Compared to a home loan from a financial institution, an HDB loan has more stringent eligibility requirements. The following covers most of them.
Eligibility criteria:
- For HDB floors only (resale or direct purchase from HDB)
- At least one buyer must be a Singapore citizen
- Must have gross monthly income not to exceed $10,000 (or $15,000 for extended families)
- For DBSS flat, the income limit is $8,000 (or $10,000 for extended families)
- For applicants under the Single Singapore Citizen (SSC) scheme, the income limit is $5,000
- Must not own any private residence (in Singapore or abroad) including HUDC and executive condominium
- You must not have sold a private residential property within 30 months and taken out an HDB loan before
- Must not have previously obtained an HDB loan within 30 months
- Must not have taken more than two previous HDB loans
- You must not own any more market/hawker stalls or commercial/industrial property (except if you operate the business yourself, have no other source of income and only own one market/hawker stall or commercial/industrial property)
As of July 2013, no HDB loan will be granted for flats with less than 20 years of rent. In addition, for apartments with a lease between 20 and 59 years, the approval of the loan and the tenure will be subject to certain conditions.
Given the many restrictions on an HDB loan, why do Singaporeans still want to take one? We delve deeper into the advantages of this loan in the following sections.
1. Higher withdrawal limit of the CPF (Central Provident Fund)
For financing through bank loans, the withdrawal limit of the CPF Ordinary Account is up to 100% of the valuation limit (VL), which is the lower of the purchase price or the valuation at the time of purchase. If the loan is still outstanding when this limit is exceeded, the home withdrawal limit may be increased to 120% NAV as long as half (full) of the Current Minimum Sum is reserved for borrowers under age 55 (55 and over). This home withdrawal limit varies with the date of purchase of the apartment, for purchases from 2008 it is 120%.
However, with a concessional loan from HDB, you can enjoy a higher withdrawal limit.
For the direct purchase of HDB, there is no limit to the savings in the Ordinary Account that you can use.
In the case of resale HDB flats, there is no limit to the Ordinary Account savings that you can use, once you have allocated half of the current Minimum Sum.
But as of July 2013, for apartments with leases between 30 and 59 years, the use of the CPF fund is allowed only if the remaining rent covers the buyer for at least 80 years. For such floors, the withdrawal limit will be calculated according to the following formula:
Withdrawal Limit
= (The remaining rent of the flat or property when the youngest owner is 55 years old / The rent of the flat or property at the time of purchase) x BV
For example, at the time of purchase the buyer is 38 years old and the lease is for 40 years. When the buyer turns 55, the remaining lease will be for 23 years. That’s why
Withdrawal limit = 23/ 40 x NAV
Table 1 further illustrates what VL is.
Table 1: VAP
Plane A
Purchase price (S$) = 400,000
Valuation (S$) = 350,000
Net Asset Value (USD) = 350,000
floor B
Purchase price (S$) = 370,000
Valuation (S$) = 420,000
Net Asset Value (USD) = 370,000
For apartments with less than 30 years of lease, the use of the CPF fund is prohibited. In other words, buyers will put down cash for a down payment, monthly loan payment, stamp duty, and other miscellaneous fees.
2. No cash component required for down payment
A key advantage of an HDB loan is that you do not have to pay any part of the down payment in cash. You are allowed to use the balance of your CPF (Central Prevent Fund) Ordinary Account to pay it in full.
While with a bank loan, you must pay at least 5% of the Valuation Limit (LV) in cash. If the loan tenure exceeds 30 years or extends beyond 65 years, the minimum amount increases to 10%.
3. Higher loan amount
For the first HDB Concessionary Rate Loan you are taking out, the loan amount is as high as 90% NAV. On the contrary, for bank loans, the amount is capped at 80% LTV (loan-to-value ratio). It is reduced to 60% if the term of the loan exceeds 30 years or extends beyond 65 years.
The new regulations, which went into effect on January 12, 2013, dictate that the Mortgage Servicing Ratio (MSR) for private loans must not exceed 30% of the borrower’s gross monthly income and 35% for HDB loans.
Effectively, this can translate into a lower loan amount for a bank loan compared to an HDB loan.
For example, for a 30-year 80% loan for a S$800,000 HDB floor, at an interest rate of 1.5% per annum, the monthly repayment amount will be S$1,932.67. To be eligible for a
- HDB loan: Gross monthly income ≥ S$ 5,521.92
- Private loan: Gross monthly income ≥ S$6,442.24
Therefore, if your income is below S$6,442.24, you will not be eligible for an 80% LTV private loan. If you extend the term of the loan, current rules mandate that you can only take up to 60% LTV.
Therefore, an HDB loan will allow for a larger loan amount.
4. HDB is more forgiving
As a government agency whose primary goals are to provide quality affordable housing and encourage homeownership, HDB tends to be more forgiving of delinquent borrowers.
But for a loan from a financial institution, you are always obligated to pay the stipulated amount each month, even if you have suffered a pay cut.
In addition, HDB generally grants a deferral of the payment of the monthly payment if you have had financial difficulties. The banks, on the other hand, will probably be on your heels if you defer payment even for a day!
5. No penalty for partial or total repayment of the loan
It is noteworthy that HDB imposes zero penalties for the partial or total payment of your loan.
However, most mortgages from financial institutions come with a lock-in period (also known as a commitment period) usually 3-5 years. During this period, any refund above the previously agreed amount will result in a penalty, generally a maximum of 1.5% of the refund amount. Financial institutions benefit from the interest incurred on the loan, any partial or full repayment of the loan means a loss in interest income. Therefore, the penalty helps to offset this loss.
6. Interest rate stability
Since the interest rate review for an HDB loan is done quarterly along with changes in the CPF rate, which has been the same for over 10 years. The interest rate has also remained stagnant. An HDB loan, therefore, offers relatively more stability than even a fixed-rate mortgage, whose rate is only fixed for 3-5 years. This is not to say that there have not been fluctuations in HDB interest rates. For example, in the 1990s rates showed greater volatility.