Should You Still Choose A Bank Home Loan Over An HDB Loan?

Bank home loans are getting more expensive and might even reach a 20-year high. Here’s what to consider when choosing between a bank mortgage and an HDB mortgage in Singapore.

Bank home loans are expected to hit a 20-year high of as much as 5% in the coming months as the US Federal Reserve continues to aggressively hike interest rates in an all-out bid to tame runaway inflation.

This would be an extension of the rise in bank mortgage rates that have been taking place since the start of the year, a development that warrants the attention of all homeowners.

(Pro tip: If you're a homeowner navigating through these escalating rates, exploring alternatives like personal loans could provide some relief. Personal loans offer flexibility and competitive rates, making them a viable option against soaring mortgage costs.)

Here’s the Singapore Overnight Rate Average (SORA) – a metric that banks in Singapore use to determine home mortgage interest rates – at the end of each month in 2022.

As a result of the rapid rise in SORA, bank home mortgage rates are now higher than the HDB mortgage rates and more importantly, may remain elevated for a prolonged period, given current global events – such as the stalemate in the Russian-Ukraine war, China’s prolonged zero-COVID policy – continuing to sponsor inflationary pressures.

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Bank home loans are getting more expensive, but HDB home loans remain steady

One silver lining for homeowners is that HDB home loan rates have remained steady – as they have throughout past recessions – offering a lower-cost option to finance their homes.

Of course, this option is only available if you are buying an HDB flat, so if you’re looking to finance a private property purchase, you’re going to have to brace yourself for some pretty high-interest rates.

But however, if you’re deciding between a bank loan and an HDB loan for your HDB flat, what you end up choosing will pretty much depend on your preferences – and also your risk appetite.

We’ll get into the whys later, but first, let’s take a closer look at the differences between the two.

Once you switch you can’t go back

We’ve written a detailed guide on how to choose between an HDB home loan and a bank home loan, but here are the important differences to focus on for the purpose of this article.

Interest rates

Bank home loans come in two varieties – fixed-rate and floating rate. But despite that, bank mortgages aren’t truly fixed; “fixed-rate” bank loans lock in your interest rates for a few years at the most. Thereafter, a floating rate, which is pegged to SORA, will be applied.

HDB mortgages, on the other hand, are the only true fixed-rate home loans in town. Since their inception, interest rates have been fixed at 0.1% + the prevailing CPF Ordinary Account interest rate – which has held steady at 2.5% per annum. Therefore, you can expect HDB home mortgage rates to be 2.6%, likely indefinitely (see below for why).

Flexibility

HDB home loans are strictly a one-way affair. Once you’ve signed up for one and you decide to switch to a bank loan halfway through, you will not be able to switch back to an HDB loan.

This is important to note because while switching to a bank loan when interest rates are low (such as between 2009 - 2015) will no doubt lower your monthly mortgage payments, you will not be able to hop back into the “safe harbour” of an HDB home loan when interest rates start spiking up.

In contrast, bank loans have no such restrictions. Save for a minimum commitment period that comes with certain mortgage packages, you are free to refinance your loan at a different bank whenever the need arises.

However, bank home loans are priced very competitively, which means the offers you find are unlikely to offer any significant or meaningful differences. This means that you may be stuck with costly home mortgages no matter where you look during periods of high-interest rates.

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Monthly repayments - fixed or variable?

It all boils down to this: Do you prefer to simply pay a fixed amount every month for the duration of your mortgage?

Or are you willing to accept mortgage payments that could vary over time – and the accompanying advantages and disadvantages?

If it’s the former, then taking an HDB mortgage is your best choice; your monthly mortgage will remain the same all the way, providing comfort in familiarity. 

This is because the HDB home loan interest rate is all-but-guaranteed to remain at 2.6% per annum for the foreseeable future until such time as the authorities deem fit to make changes.

And even then – given the closely-held tenet of homeownership in Singapore – any proposed amendments will likely be hotly debated, with any implementation taking place slowly. Which means you’ll have ample time to consider your alternatives.

As for bank home loans, interest rates will move according to rates set by the MAS, in response to macroeconomic changes such as inflation, as explained earlier in the article.

Now, as inflation is more or less cyclic you can expect bank mortgage rates to adopt a similar pattern, rising and falling over time. Getting caught in an upswing in rates (as seen this year) means that you have to contend with higher and higher mortgage payments.

This can be a problem because rate hikes may be accompanied by job cuts, and you may have to deal with being retrenched at a time when your home mortgage payments are at their highest.

On the flipside, central banks like MAS cut interest rates in an effort to encourage borrowing, which means there’s more money in the economy to go round – a situation popularly referred to as a “boom”.

The cuts also result in lower home mortgage rates, which means lower mortgage payments, and thus, more money for you to put to other uses, such as investing or savings.

Recognise that this advantage is not guaranteed, as there’s no way to know for sure when your mortgage rates will go down. There’s every chance that your mortgage rate will remain at elevated levels throughout the tenure of your home loan.

And even if rates do fall enough to make a substantial difference, you’ll need to hunt around for a suitable home mortgage package and refinance your existing home loan before you can access the new rates and realise those savings.

For those willing to roll the dice, bank mortgage loans may potentially be a good choice – but even then, only if everything goes your way.

However, if stability is what you value, then HDB home loans would be the better option.

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