After nearly seven consecutive years of decline, the HDB resale market appears to have turned a corner. They peaked in 10 years in the third quarter of 2020; and there’s a good chance the momentum will continue.
Perhaps you yourself have been tempted by a resale apartment, given the large number of new (five year old) apartments that have just entered the market. Or maybe you are one of the lucky Singaporeans who won the giant BTO exercise in August 2020. Either way, you’ll quickly realize something that seems downright unfair:
Private bank lending rates are on average around 1.3 percent per annum at present, while HDB concessional lending is 2.6 percent. How can condo owners pay half the interest rate of HDB owners?
Well, you can refinance from an HDB loan to a bank loan if you want – but it’s important to get the big picture first:
How HDB Loan Rates Are Determined Against Bank Loan Rates
The HDB loan rate is set 0.1% above the prevailing CPF rate, which has remained at 2.5% since around 1999. As such, the HDB loan rate has also been 2.6 % over the past two decades.
Since the interest rate has not changed for 21 years, it is common for most homeowners to view HDB loans as a “fixed rate”. But note that this is not technically correct: CPF rates are revised on a quarterly basis. If CPF rates ever increase, your HDB loan rate will increase with that.[
Bank loans are more complex. We have a more detailed explanation in a previous article. But to summarize, bank real estate loans are either based on the Singapore Interbank Offered Rate (SIBOR) or fixed by the bank itself (for example, indexed to the bank’s fixed deposit rates or another rate in the bank. advice).
Bank loan rates fluctuate more often; the interest rate often changes monthly, or every three months, for most loan options.
Bank lending rates are currently at record highs due to the United States Federal Reserve keeping rates near zero. This is expected to last until at least 2022. Right now, that means it is possible to find home loans at around 1.3 percent.
How much money are we talking about exactly?
Let’s say you have an outstanding loan of $ 350,000 for your apartment. It is with a loan term of 25 years.
Using a 2.6% per annum HDB loan, your approximate monthly repayments are approximately $ 1,588. About $ 758 of this amount is for interest service only; you would therefore pay about $ 126,353 in interest at the end of the loan.
On the other hand, let’s say you have more of a bank loan and you owe the same amount, with the same loan term. At 1.3% per annum, you would pay about $ 1,367 per month, including $ 379 for interest. After 25 years, you would pay about $ 60,138 in interest.
That’s a difference of about $ 66,215.
However, there is an important caveat to add
The interest you will pay on the HDB loan is higher, but it is also more predictable. The HDB loan rate, as we mentioned above, rarely changes.
With bank loan rates, it’s hard to predict what they will be 10 or 15 years from now, let alone when your loan term will end.
We can tell you that bank lending has been at 2% or less since about 2009; but it was caused by a black swan event – the global financial crisis. At the time, the US Federal Reserve also cut interest rates to stimulate the economy.
Covid-19 is also a black swan event; the one that happened after interest rates started to normalize. Thus, interest rates have been kept low by two unusual circumstances.
Before the current low interest rate environment, bank loans were sometimes more expensive than HDB loans. In the 1990s, for example, bank loans were typically around 4% per annum.
So, on the one hand, we can say with certainty that bank loans could have saved you more money from around 2009 to the present day. However, there is no guarantee that will be true after 25 years.
With that in mind, should you refinance your HDB loan into a bank loan?
The key factors to consider are:
- Justify the refinancing costs
- Whether you repay the mortgage in cash
- There is no way to undo this action
- Your future plans for the apartment
- Penalties for early repayment
- Clemency in case of problem
1. Justify the costs of refinancing
Refinancing can mean paying transfer fees. This ranges from $ 2,500 to $ 3,000, which can sometimes be paid with your CPF (depends on the law firm you use). In addition, there may be other fees such as bank processing fees or appraisal fees.
You need to determine if any savings justify the expense. In the example above, switching to a bank loan increases the monthly repayment from $ 1,588 to $ 1,367; that’s a savings of $ 221 per month.
Assuming you pay $ 2,500 to refinance, it will take you about a year to cover the cost of refinancing. In some cases, it may not be worth moving forward; as if you are planning to upgrade and sell your apartment next year anyway.
2. That you repay the mortgage in cash
Whether you are using a bank loan or HDB, you can manage home loan repayments from your CPF.
However, some owners use cash instead of CPF (for example because they want to accumulate more CPF for retirement, or want to avoid negative cash sales when upgrading).
You may feel worse if you pay a few hundred a month out of pocket. A difference of a few hundred dollars a month can mean more to these homeowners as it directly affects their wallet. On the other hand, homeowners who fully service their loan with CPF may not notice the difference.
3. There is no way to undo this action
You can refinance from an HDB loan to a bank loan, but the reverse is not possible. Once you decide to go with a bank, you are stuck with the decision all the way.
This means that you are at the mercy of more volatile interest rates and need to be more proactive: you will need to actively compare mortgage rates every few years and take steps to refinance to keep your loan rates low. .
4. Your future plans for the apartment
Do you intend to stay in the apartment for good, or will you move after the minimum occupancy period (MOP)? This has an impact on your decision to refinance.
Homeowners who use their apartment as a “stepping stone” to private property are often inclined to bank loans. They worry less about interest rates in 10 or 15 years because they intend to sell around the five-year mark or soon after.
In the meantime, they want low interest repayment rates, because that ultimately means better earnings.
Some landlords who rent out their apartments are also inclined to take cheaper bank loans, as this helps to increase their net rental yield.
If you are considering your apartment in terms of asset development or rental, leave us a message on facebook ; we can give you better advice for your specific situation.
4. Penalties for early repayment
Most banks charge penalties if you try to prepay your mortgage; the typical penalty is 1.5 percent of the amount you prepay. It may be an additional cost when you want to sell.
For example, suppose you want to sell the apartment when you still owe $ 200,000. If your home loan imposes a prepayment penalty, you will need to pay an additional $ 3,000 to redeem the loan.
Different loan packages have varying terms and conditions. Some home loans do not charge a prepayment penalty if you sell your home; some will only charge the penalty for a certain portion of the prepayment (eg, 1.5 percent on the first $ 100,000 only).
Many banks will not charge the prepayment penalty after a certain period, such as three to five years.
HDB loans, on the other hand, do not have such penalties. You can pay off your entire HDB loan in one go if you want (if you hit 4D or something like that). This means that there is no interest repayment at all.
5. Leniency in the event of a problem
HDB’s mission is to keep a roof over our heads, so they’re less inclined to foreclose on your apartment if you can’t pay. HDB can be forgiving in events such as medical emergencies, job loss, etc. (case by case).
Banks can’t give you that much leeway because they’re businesses that need to be run in a certain way. If you can’t pay your mortgage for some reason, the bank is quicker to foreclose.
For those who buy their apartment now, know that you can choose to start with a bank loan if you wish.
The main difference is that, if you are using an HDB loan, the minimum down payment is 10 percent, which can be fully repaid with the CPF.
If you are using a bank loan, the minimum down payment is 25 percent (five percent cash and 20 percent any combination of cash or CPF).
In conclusion, it might be a good idea to switch to a bank loan now, especially if you don’t have the apartment for the long term.
Interest rates are at an all time low and will be for the foreseeable future as the world recovers from Covid-19. If your plan is to upgrade after the next five years, it is worth considering a bank loan to save money over the period of your MOP.
However, if you stay in your apartment indefinitely, the risk is greater – the situation might not be the same in a decade.
This article first appeared in Stacked houses.