Spotlighting HDB loans amid rising rates

To curb rising inflation, governments across the world have been increasing interest rates to encourage people to spend less. Naturally, mortgage rates have been on the rise and are expected to head north in tandem with interest rate hikes. 

In Singapore, it’s been reported that Singapore fixed home loan rates hit a new high of 3.08%, as local banks make successive changes to their fixed mortgage packages. As of June 30, UOB has raised the rate on its three-year fixed rate package to 3.08% p.a., from 2.8% p.a. DBS upped its rates for its two and three-year fixed rate package to 2.75% p.a., and removed a five-year fixed rate package at 2.05% p.a. meant only for HDB owners,The Straits Times reported. 

The 3-month compounded Singapore Overnight Rate Average, or Sora, has been rising, hitting 0.757% on June 30. Floating rates for home loan packages are typically pegged against 1-month or 3-month Sora and the total mortgage rate is tallied up with a fixed spread that can range between 0.8% p.a. to 1% p.a as of June this year.

Read more: Facing up to rising mortgage rates

Against that backdrop, more homeowners are interested in HDB loans. For some HDB owners, they might be eligible for a concessionary loan for their HDB flat, which is fixed currently at 2.6% p.a. Here are some key things to know about HDB loans before you buy a home.

Read more: With rising interest rates, should housing loans be repaid early?

HDB loan priced at 0.1% above CPF-OA interest rates

As stated by HDB, the HDB loan is pegged at 0.10% above the CPF Ordinary Account (OA) interest rate, which is currently at 2.5% p.a. The CPF OA interest rates are benchmarked against the 3-month average of major local banks’ interest rates and are subjected to a legislated minimum of 2.5%. The interest rates are reviewed on a quarterly basis.

CPF OA interest rates have not exceeded 2.5% p.a. since July 1999, following a short period of interest rate hikes due to the Asian Financial Crisis.

New property cooling measures

Singapore regulators introduced on 30 Sept 2022 new property cooling measures, which included tighter maximum loan quantum limits for housing loans to ensure prudent borrowing and avoid future difficulties in servicing home loans.

Singapore regulators tightened the rules around HDB housing loans, lowering the loan-to-value (LTV) limit for HDB housing loans from 85% to 80%. In other words, the amount that HDB will lend to flat buyers will be no more than 80% of the price of the property.

Since both first-time buyers and buyers from lower-income families can access significant housing grants, the impact of the tightened LTV ratio should be limited for them. The tightened LTV limit will apply to new flat applications for sales exercises launched and complete resale applications that are received by HDB on or after 30 Sept 2022.

HDB’s concessionary interest rate of 2.6% p.a. is unchanged.

But for new applications for an HDB Loan Eligibility starting 30 Sept 2022, it will introduce an interest rate floor of 3% p.a. to calculate the eligible loan amount.

The Monetary Authority of Singapore (MAS) has also raised by 0.5%-point the medium-term interest rate floor used by private financial institutions to compute a borrower’s TDSR and MSR.

The regulator said the move reflects higher interest rates expected over the medium term, compared to the period of exceptionally low rates from 2013 to 2021.

HDB loans require a lower downpayment of 20%

HDB loans only require a downpayment of 20% of the property valuation (previously 15%), compared with a 25% for bank loans. Note that for resale flats, you might be purchasing the property above market valuation (also known as Cash Over Valuation, or COV), and that you would have to pay the COV fully in cash.

Your CPF-OA balance will largely be wiped out

Some of us may prefer to hold on to cash or CPF savings, and take up a bigger loan when we can. After all, we might have other financial obligations that we want to keep some emergency savings for, or we may find the cost of a HDB loan to be attractive. 

Unfortunately for HDB loans, balance from CPF-OA must be used to pay for the flat, although the HDB buyer have these options with HDB loans:

1. Retain up to $20,000 of the available savings in each of their CPF Ordinary Account (OA). This additional $20,000 might be eligible for additional 1% interest for CPF
   
2. Use the savings in their CPF OA to pay the stamp fee, registration fee, legal fees, and premium for the CPF Home Protection Insurance (if applicable).

For those who would like to grow their wealth more aggressively, they can choose to minimise their CPF OA balances and take up a larger HDB loan by emptying their CPF-OA account and using these hacks:

1. Do a CPF-OA to CPF-SA transfer. The higher interest rates of SA (4% p.a.) means you make a net gain against your HDB loan.
   
2. Invest your CPF OA. By investing in mainly the equities markets, you are taking risks in hope of making more than 4% p.a. over the long term.

Be mindful that taking up a larger loan means your monthly repayments will be higher too.

Switching to a bank loan is free

You are free to refinance the loan with a bank after taking up the HDB loan. This is normally done to take advantage of lower mortgage rates that the banks in Singapore may offer during periods of low interest rates, as was seen in the past decade. Note though that once you have refinanced your HDB housing loan with a bank, HDB will not permit you to refinance that loan using a HDB loan subsequently.

Refinancing terms are also subject to approval from the banks, which are keen to take up a larger loan quantum. If you are making a modest HDB purchase, you may want to consider taking up a larger HDB loan first so you have greater flexibility.

Read more: Why you should use CPF to pay for your mortgage

HDB loan eligibility comes with income thresholds

To be eligible for HDB loan, your monthly household income should not exceed: 

1. $14,000 for families;
2. $21,000 for families with working child/children;
3. $7,000 for singles purchasing property under the Single Singapore Citizen Scheme.

Typically, bonuses, rental and dividend incomes, and staff benefits are not included in income assessment. 

There is no early repayment penalty for HDB loan 

Unlike bank loans, there is no penalty for paying back the loan early, and there are no transaction costs. You have the flexibility to pay off parts of your HDB loan earlier so you incur less interest expense.

HDB loan vs bank loan — final considerations

In this period of rising interest rates, being able to take advantage of the lower interest rates of the HDB loan is an emerging benefit. This is especially so given that the peg for HDB loan, which is based on CPF OA interest rates, has not changed for the past 20 years.

That said, HDB home owners making decisions over their mortgage should weigh the HDB loan option against using the balance from CPF-OA to pay for the flat. They should consider where interest rates are headed not just for the next one year, but the next five years too — comparisons should not just be made on banks’ fixed-rate packages but also with floating-rate or hybrid options, so consumers can come to a thoroughly informed decision. 

A home is a lifetime commitment. The home you pick should be one that you can afford through periods of higher interest. As it is, banks project your mortgage debt obligations based on the higher of a 3.5% interest rate or the market rate, to ensure that your borrowings meet the limits under the Total Debt Servicing Ratio (TDSR) framework.

Finally, as a property is an illiquid asset, remember to leave funds available for investments and savings, for peace of mind through the years.

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