Although we Singaporeans have the same Singapore property dream, we often have rather different ways of financing and paying for our HDB flats or private property, depending on our personal preferences, financial capacity, needs, and goals.
In this article, we’ll talk about the common ways that Singaporeans pay for their home loans, and how they fit into different financial goals and plans.
If you’re about to purchase your new home and you’re still exploring your financing and payment options, hopefully, this could help you decide which approach would be best for your situation. You’re welcome!
HDB vs Bank Loan
Monthly Mortgage Repayments
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HDB Loan vs Bank Loan
Here are three of the most common financing options that Singaporeans consider when buying a new home:
1. HDB Loan All the Way
Most Singaporeans choose to buy HDB flats because they’re more affordable than private properties and executive condos (EC). The ‘default’ financing option for HDB flats is through an HDB loan, provided by the HDB itself. Many go for this option for various reasons.
With a maximum Loan-to-Value (LTV) limit of 90%, it often requires little to no cash upfront, which is preferable for many.
It's straightforward in that there is only one interest rate/package and you can sort everything in one appointment at HDB, so you don't have to spend time to shop around.
HDB loans are often very easy to manage too. If you don’t do anything, your monthly repayments will remain the same (assuming the HDB interest rate doesn’t change, like it hasn’t in the last decade).
While this may work for those who want minimal management of their home loan, it would mean paying more interest for the mortgage since HDB’s interest rate is currently higher the banks’.
2. Bank Loan from the Get-Go
Some homebuyers choose to finance their property through a bank loan because they’re purchasing a private property or an EC, and they don’t have any other financing option (you can’t pay for a private property or an EC using an HDB loan).
Some buyers of HDB flats also go for a bank loan from the get-go because they’re aware that banks currently offer lower interest rates as compared to HDB, and they can afford to pay the higher minimum downpayment of 25%, considering that the LTV ratio for banks is capped at 75% of the purchase price or property value, whichever is lower.
Alternatively, these homebuyers may also go for bank loans because they are ‘repeat HDB buyers’ and may have already used up their maximum of two HDB housing loans, and need recourse to banks in order to finance subsequent properties.
3. HDB Loan First, Then Refinance to Bank Loan Later
Meanwhile, some buyers of HDB flats (commonly younger first-time couples) choose to apply for an HDB loan first because they can’t afford the minimum 25% downpayment for a bank loan (and compulsory 5% cash outlay), but do have the intention to refinance with a bank loan a few years later to lower their interest costs or adjust their loan tenure.
Refinancing does involve some costs (e.g. legal fees, valuation fees), but these are usually under $5,000. Some banks also offer incentives to subsidize these costs, although they often come with clawback clauses to prevent you from refinancing again with the next few years.
Also noteworthy is that when refinancing to a bank loan, the LTV is 75%, so if you have not paid off at least 25% of your HDB’s price or value, you may need to top up some cash or CPF.
Mortgage Repayments via Cash vs CPF
Besides choosing how to finance their homes, another important step is to decide how to pay for those mortgages. In this, too, many Singaporeans differ in their approach, depending on their priorities and what they feel is more worth it.
4. Mortgage Repayments Paid 100% from CPF
If you want to keep your cash savings for liquidity on hand, or for any other higher-return investment, then you can choose to pay your mortgage completely using your CPF Ordinary Account (OA) savings. Whether for HDB loans or bank mortgages, using your CPF is a commonly accepted payment method, and you can set up the necessary automatic deductions in your CPF after the bank has approved your loan.
However, you can only do this if you’re buying your home before age 55, and if the amount of the mortgage does not exceed either the valuation limit, or the withdrawal limit. The valuation limit is the purchase price or property value at the time of the purchase, whichever is lower. The withdrawal limit is the maximum amount of CPF for a home loan which is capped at 120% of the valuation limit.
Therefore, if the purchase price of an apartment is $250,000 and its property value is $270,000, the Valuation Limit should be $250,000 and the Withdrawal Limit is $280,000. You can only pay with CPF within these amounts.
5. Mortgage Repayments Paid 100% in Cash
On the other hand, some homebuyers choose to fully pay in cash because they want to keep their CPF longer to earn interest, and probably use it to pay off their home loan early or at least pay a part of their remaining debt in a lump sum later on. (Of course, this makes sense only if your mortgage rate is lower than the CPF OA interest rate. If you have an HDB loan (which is pegged at +0.1% of the CPF OA), then using cash will cost you instead.)
Indeed, CPF interest rates at 2.5% (for the Ordinary Account) are very decent, and in the absence of investments that offer a higher rate of return, keeping your money in your CPF account for the Government to grow for you still constitutes a profitable investment, one that you would forego if you took the money out to pay for loans.
Paying completely in cash of course puts a higher strain on one's immediate cashflow every month, but if you are confident of your income and do not have any other investments or things you need to spend cash on, then paying by cash is certainly an attractive option.
6. Mortgage Repayments Paid with Part CPF and Part Cash
For some homeowners, they prefer to strike a balance between CPF and cash in order to get the best of both worlds, or simply because they cannot afford to pay in cash completely.
In choosing to pay for their home loan partly in cash and partly from your CPF OA, they ensure that they still continue to reap the benefits of both methods of payment, at least partially for both.
Some homeowners also first start out with relying on CPF, before slowly easing into using cash for part of the repayments once they are in a better financial situation (e.g. better earning power).
Reprice, Refinance or Do Nothing At All
Besides financing and paying for loans, many homeowners also consider changing their loans from time to time, in order to pursue a financial advantage, either from different terms, or lower rates and interest charges.
Repricing allows borrowers to switch to a new home loan package within the same bank or financial institution. Some Singaporeans consider this option if they want to lower their monthly repayments and interest rates, but since they have a very positive experience with their existing bank, they choose to reprice rather than refinance. It could also be that the homebuyer was led by the bank to this option by advertising good repricing rates.
On the other hand, some borrowers who want to lower their monthly repayments, interest rates, and/or loan tenures look for options outside their current loan provider. They compare interest rates with other banks, and decide to move to other more attractive packages. Refinancing usually provides better incentives as compared to repricing because many banks offer considerably better rates as they really want to get new customers on board.
However, as mentioned above, refinancing commonly involves forking out some cash which may cost between $3,000 to $5,000. If you intend to refinance, be sure to compare the best packages here!
9. Don’t Reprice or Refinance
Lastly, some homebuyers choose manage their mortgage passively.
We get it—the inertia to get up and revisit your mortgage is high. It’s easy to go into autopilot mode when everything is running seamlessly in the background. You’ve already secured a mortgage and the regular instalments are automatically deducted from your CPF OA and/or bank account monthly… Do you really have to do anything else?
Many homeowners have this ‘out of sight, out of mind’ tendency, and while this could be the easiest way forward, it often incurs the most cost because it means losing out on more competitive mortgage rates!
Conclusion: Which 'Strategy' is Best?
Each of these mortgage payment and management strategies have their pros and cons and at the end of the day, there is no right or wrong option. What matters most is what would work best for your situation and financial goals. You'll need to weigh your own financial needs, and calculate the potential costs and gains, before adopting any course of action, whether you're getting a new home loan, or refinancing an existing one.
If you need help in assessing which financing and payment scheme would suit you best, PropertyGuru Finance’s Home Finance Advisors are more than willing to assess your specific situation, and give professional recommendations. Just fill up this enquiry form, and we’ll come back to you soonest. Hope this helps!
Which Home Loan is Best in Singapore?
There is no single 'best' home loan package for everyone. Depending on your preferences and financial situation, you may compare the most competitive bank loans on PropertyGuru Finance to find the most suitable one for your needs.
Can I Switch from Bank Loan to HDB Loan?
No. Once you have a bank loan, you cannot switch to an HDB loan.
How Long is HDB Loan?
For new HDB flats, HDB loans are capped at 25 years.
Is it Better to Use Cash or CPF for Housing?
There is no 'better' option. This depends on your financing strategy and goals.
What's the Difference Between Refinancing and Repricing?
Refinancing is when you change your existing home loan to a new package with a new bank. Repricing is when you switch to another package, but within the same bank.
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