HDB Loan Vs Bank Loan: Pros & Cons
TLDR When deciding between an HDB loan or a bank loan for purchasing a property in Singapore, consider key factors...
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TLDR
The Fed’s recent 0.5% rate cut is likely to lower Singapore’s SORA-based home loan rates, benefiting those with bank loans in the short term. However, not all borrowers will gain equally—those on longer SORA periods or locked-in fixed rates may not see immediate savings, and refinancing can incur penalties. HDB loan rates and loan qualification criteria (TDSR/MSR) remain unaffected as banks still use a 4% floor rate for calculations. While lower rates can make mortgages cheaper, they may also push property prices higher, potentially offsetting the benefits. The current market differs from past low-rate periods due to increased housing supply. Whether to buy, sell, or wait depends on individual needs—consult a property expert for tailored advice.
The Federal Reserve of the United States (the Fed) has recently reduced interest rates by 0.5 per cent. This is a significant change, as the Fed usually adjusts interest rates in smaller steps (0.25 per cent). This decision will likely influence interest rates in Singapore, suggesting that home loan rates may decrease alongside those in the US. However, it might be premature to celebrate: Singapore has experienced the repercussions of low interest rates previously, and it hasn’t always worked out favourably for homeowners. Here’s what you should be aware of:
A brief overview of the significance of the Fed’s rate cut for your mortgage.
If you are using bank home loans (as opposed to HDB loans), you might be on a SORA loan package. The SORA rate determines the interest rate applicable to your loan – as SORA fluctuates, so will your interest rate. SORA is influenced by interest rates in the United States: when the Federal Reserve increases rates, SORA tends to rise, and the same occurs in reverse.
The Fed adjusts its rates based on the performance of the US economy: during a recession or the threat of one, the interest rate is reduced to encourage economic growth. We witnessed this during the peak of the Covid pandemic. In 2020, the Fed slashed rates to near-zero, resulting in SORA dropping to as low as 0.8 per cent.
This was not an isolated incident; there was also an extended period of low interest rates following the 2008 Global Financial Crisis. During that time, rates were so minimal that even buyers of HDB flats sometimes chose to go with bank loans: for over a decade post-crisis, interest rates remained around two per cent (slightly above one per cent just before the crisis). Borrowers from that era were fortunate, paying rates even lower than the HDB loan rate of 2.6 per cent.
In the last two years, however, interest rates have risen substantially, consistently exceeding three per cent. This increase was one of the factors that prompted MAS to elevate the floor rate for calculating debt servicing ratios in 2022.
Nevertheless, with the recent significant rate cut, we might be on the verge of returning to a lower interest rate landscape.
A reduction in rates should be positive news for home buyers, wouldn’t you agree?
To a certain extent, yes. If you are purchasing with a bank loan, you will probably incur lower interest than in the last two years. However, not every loan package will offer the same advantages. Some aspects to take into account include:
- Duration of the interest rate
- Refinancing possibilities for current homeowners
- Whether you chose a SORA loan
- No effect on debt servicing ratios as of now
1. Interest rate period
When interest rates decrease, opting for a shorter interest rate period typically – though not always – yields greater advantages. For instance, if your loan is tied to a one-month (1M) SORA rate, you would theoretically experience the benefits of these rate reductions more swiftly; this is because your interest rate adjusts to align with SORA each month.
Conversely, if you have a longer interest rate period, like a three-month (3M) SORA, your rates only update to reflect the new SORA rates every three months. Thus, even if rates decline, you will continue to pay the higher rates from three months earlier.
This also means that the opposite holds true: when interest rates are increasing, a longer interest rate period is advantageous (i.e., you benefit from the lower rate from three months prior when rates go up). Most homebuyers who secured their loans in 2022 likely opted for a 3M or longer interest rate period, as rates were on the rise at that time.
However, it’s worth noting that this doesn’t always play out as anticipated, so it’s advisable to consult a mortgage broker for more detailed information.
2. Options for refinancing for current homeowners
The significant rate cut has come as a surprise. Between 2022 and quite recently, employment rates in the US were on the rise, while inflation became a concern (when interest rates remain low for an extended period, inflation often escalates – which is why the Fed has been advocating for higher rates following Covid).
As interest rates were increasing, many homeowners chose fixed-rate loans. These loans typically come with lock-in periods of three to five years, during which refinancing incurs a penalty. However, the locked-in rates might be higher than the new, reduced rates, potentially leaving some borrowers in a challenging situation if they recently secured a high fixed rate.
Refinancing from a fixed-rate loan could involve penalties of 1.5 per cent of the undisbursed loan amount, along with administrative costs. For some homeowners, this means watching from the sidelines as others benefit from lower rates.
On the upside, your bank might provide repricing options that allow you to switch to a more affordable loan with the same lender; however, this is not always guaranteed.
3. Whether you chose a SORA loan
For homeowners who secured their loans many years ago, you might be using Board Rate (BR) loans, which are not linked to SORA. An example of this type is the fixed-deposit rate loans, where the interest is determined by fixed-deposit products.
A few years back, these loans gained popularity because, in theory, banks would be discouraged from increasing your interest rate since that would also raise the interest they needed to pay on deposits.
It’s uncertain how your loan will perform under the current circumstances. If lower interest rates result in reduced fixed-deposit rates, you could potentially benefit. However, if your interest rates are tied to a specific tranche or group of fixed-deposit products that don’t adjust to reflect the current market, you may not enjoy any additional advantages.
As mentioned previously, you might also encounter penalties if you attempt to refinance from an existing BR loan.
4. There has not been any effect on debt servicing ratios so far.
For first-time homebuyers, the reduced rates do not simplify the process of qualifying based on debt servicing ratios like TDSR or MSR. Banks apply a floor rate of four per cent for these calculations. For instance:
Imagine that, hypothetically, the interest rate decreases to 2.8 per cent for your loan. If you take out $1.5 million for a period of 25 years, your estimated monthly repayment would be around $6,958.
However, when calculating your TDSR limit, the bank uses an interest rate of four per cent, irrespective of the actual market rate. Therefore, for a $1.5 million loan over 25 years, your repayments are estimated at $7,918 per month, even though the true amount would be significantly lower.
Consequently, new homebuyers will find it challenging to qualify for loans simply because rates have fallen. This will remain the case until MAS opts to reduce the floor rate in line with market conditions.
However, the most significant worry is the last one.
When interest rates decrease, it is common for home prices to rise. Coincidentally, we just published an article this week on the prices of resale flats, which highlighted how a phase of low interest rates has led to increased prices. This is applicable to both private properties and HDB flats.
To clarify, we cannot predict that this will mirror the financial crisis, the Covid pandemic, or any previous years of low interest rates. First, we are unsure how temporary this situation is and whether there will be additional rate cuts. Additionally, we have just exited a housing supply shortage: the availability of homes (both private and HDB) and GLS sites is at an all-time high. This presents a different housing landscape compared to both the financial crisis and Covid. The saying “this time it’s different” is often viewed as a sarcastic quip regarding market trends, but it genuinely applies at this moment.
While it is improbable that home prices will surge as they did during earlier periods of low interest rates, more affordable loans could prolong any upward trend in prices.
For updates on the evolving situation, follow me here. If you wish to have a more detailed consultation, you can reach out here.
Should You Buy, Sell or Wait?
If you’re reading this, you must be trying to figure out the best course of action right now: is it the right time to buy or sell?
It’s difficult to give an exact answer since everyone’s situation is unique and what works for one person may not necessarily work for you.
I can bring you a wealth of on-the-ground experience and a data-driven approach to provide clarity and direction. From beginners to experienced investors, our top-down, objective approach will help you on your real estate journey.
I can help you by:
- Offering Strategic Real Estate Advice – I can help create a comprehensive plan to guide you through your property journey.
- Connecting Your Home with the Perfect Buyers – Through stunning visuals, an effective communication strategy, and an in-depth knowledge of the market, we’ll ensure your home is presented in the best possible way to fulfill your goals.
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