How is the interest rate on a HDB mortgage loan determined? Should you instead obtain a bank loan when purchasing a home? This is what you ought to know.

SINGAPORE: As interest rates on home loans rise, a growing number of apartment buyers are turning to the Housing and Development Board (HDB) rather than banks to finance their purchases.

Compared to bank rates of less than 2%, HDB’s concessionary mortgage rate of 2.6% was formerly deemed expensive.

However, as a result of the Federal Reserve’s decision to raise interest rates in the United States to combat rising inflation, interest rates and mortgage rates in Australia have also increased, with bank home loan rates currently exceeding 2.6%.

Could the HDB rate also increase? What you should know is as follows:

What is the HDB mortgage interest rate, and who can apply?
The current interest rate for concessionary HDB mortgage loans is 2.6%.

Only homebuyers with incomes below certain thresholds are eligible for HDB loans. Singles pay S$7,000, while families pay S$14,000 and extended families pay S$21,000.

At least one buyer must be a Singaporean, and candidates cannot have received two or more HDB housing loans in the past. There are additional restrictions based on the buyers’ other property holdings.

What factors impact the HDB mortgage interest rate?

Currently, the HDB concessionary loan rate is 0.1% higher than the CPF Ordinary Account rate. In a letter to the Straits Times forum in 2020, HDB revealed that the government had provided it with mortgage loan funds at the CPF OA interest rate. The additional 0.1% covers loan administration expenses incurred by HDB.

The HDB concessionary loan rate has remained at 2.6% for the past two decades, while the rate for the Ordinary Account has remained at 2.5% since 1999.

According to Mr. Bruce Chow, head of loan concierge at property portal, this was not always the case.

Therefore, if the CPF Ordinary Account interest rate increases, so will the HDB loan interest rate.

Consequently, how is the CPF OA interest rate established?

The interest rate on the CPF Ordinary Account is linked to the average three-month fixed deposit and savings rates of three major Singaporean banks – DBS, UOB, and OCBC – but is capped at 2.5% per annum.

Although the rate is reviewed frequently, it has not exceeded 2.5% since 1999.

Current CPF interest rates are higher than those of the market: See Leng Tan

According to the most recent analysis published by the CPF Board on May 27, the average three-month interest rate at the major local banks between February and April 2022 was 0.09 percent.

With rising interest rates, could the HDB mortgage rate follow suit?

Since the global financial crisis of 2008, according to Singcapital CEO Alfred Chia, interest rates have been extraordinarily low, with the US Federal Reserve’s average hovering around 4%. As a result of previous rate increases, it is currently between 2.25 and 2.5 percent.

Mr. Chia anticipates that the Fed will increase interest rates to approximately 3.5 percent by the end of the year, but he does not believe that bank savings rates in Singapore will increase enough to affect the CPF OA rate.

Prior to the financial crisis, he stated that interest rates in the United States averaged nearly 5%, while CPF OA rates remained at 2.5%.

“A procedure has been implemented, resulting in a relatively stable rate for HDB owners.

” It will not always be this way, even though it has been for the past 20 years,” he stated.

This month, questions were raised in Parliament regarding whether CPF interest rates should be increased to keep pace with inflation. In response, the Minister of Manpower, Tan See Leng, stated that despite the low interest rate environment, the Government has continued to provide substantial interest rates due to the floor rates.

Mr. Chow of stated that there may be pressure to increase the CPF Ordinary, Special, and Medisave rates to keep up with inflation. However, because their loan rates are tied to the Ordinary Account, more HDB concessionary loan borrowers may be required to pay a higher interest rate.

The government will consider this issue prior to making any decisions.

When deciding between HDB and bank loans, what else should property buyers consider?

However, there are additional factors to consider when obtaining a mortgage in addition to the interest rate. According to experts, many first-time homebuyers should consider a HDB house loan if they otherwise qualify.

Mr. Chow stated that one of the benefits is the smaller down payment compared to bank loans. Unlike bank loans, HDB allows homebuyers to borrow up to 85 percent of the property’s value.

It is also possible to pay the HDB downpayment with CPF instead of cash. In contrast, bank loans require a minimum cash payment of 5 percent.

It is possible to switch from a HDB loan to a bank loan, but homeowners cannot refinance bank loans into HDB loans.

“The long-term interest rate is demonstrably more stable,” Mr. Chia stated, adding that those who obtained bank-backed mortgages are now concerned about rising mortgage rates.

In light of the increasing unpredictability of interest rates, you may wish to consider new product launches that involve the gradual dispersal of bank loans. In comparison to private resale and HDB, interest is consequently quite low.

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