Choosing between an HDB or bank loan involves comparing each against each other to determine which one fits your financial situation better. For most Singaporeans, the loan of choice is the HDB loan. That’s because unlike a bank loan, an HDB loan is not based on your credit rating.

On the other hand, HDB loans have many restrictions, such as:

• They can only be used for the purchase of HDB flats, not private properties.
• At least one buyer must be a Singapore citizen.
• The buyer(s) income must not exceed $10,000 or $15,000 for extended families.
• The buyer(s) must not own any other domestic or foreign properties.
• The buyer(s) must not have taken out more than two previous HDB loans.
• The buyer(s) must not have disposed of private residential property within 30 months of the loan application.

How Do HDB Loans Compare to Bank Loans?

HDB and bank loans each have features that are both attractive and unappealing. So comparing the two is not only about seeing how well the benefits stack up against the shortfalls – but determining which choice benefits your financial situation the most.

Here’s how an HDB loan compares to a bank loan:

• An HDB loan is more forgiving than a bank loan: If you fail to make your repayments, HDB can defer your payments until you can. Banks are less forgiving, requiring full payment each month. HDB also caps your monthly repayments at 40% of your income, giving you more financial flexibility.

• An HDB loan has a higher interest rate: Bank interest rates are based on SIBOR and SOR rates, making them more variable. Currently, bank interest rates hover around 1.7%. The HDB loan interest rate isn’t as variable, seldom changing from its current rate of 2.6%. This makes bank loan rates more attractive, as you can lock-in a low rate for 3-5 years with a fixed-loan package.

• An HDB loan is less intrusive to your cash flow: Because HDB loans are based on the CPF interest rate instead of SIBOR and SOR rates, there’s little chance of your loan repayments rising unexpectedly because of interest rate fluctuations. This makes it easier to plan your monthly budget. HDB loans also come with fewer clauses, no pre-payment penalties, and let you negotiate deferments during emergencies.

• An HDB loan has a lower down payment: Bank loans require a 20% down payment, with at least 5% being in cash. On a $500,000 home that amounts to $25,000. HDB loans only require a 10% down payment and allow you to use your CPF to cover the whole down payment, provided you have enough to cover the amount.

• An HDB loan has no prepayment penalties: If you try to pay off your bank loan early, banks will charge you a penalty because they make money off of the interest on your repayments. HDB won’t charge you prepayment penalties, so if you get a good bonus and want to use it towards your HDB home loan, you can.