Buying the first property is the biggest investment in your life.
The process of choosing a property, determine what is the fair value for resale HDB flat, planning for renovation and also the next step which is register of marriage and wedding banquet are all major steps of life which young couple busy with.
Most of the time young couple are conveniently advised by either HDB, parents and relatives that it is good or right to take up a HDB loan for the HDB purchase.
Let me share with you the fact and figures.
- HDB Concessionary Loan
Most related parties recommended HDB Loan is a must to take for first-timer HDB owner.
It may not be a wrong recommendation as you need to only make small cash down-payment (max $5000) and the balance by CPF /Cash to make up of 10% down-payment, then the balance 90% shall be finance by HDB loan.
It is easily more affordable as young family couple may not have a high cash liquidity.
Every Singapore are given 2 times HDB concessionary loan at 2.60% per annum.
The higher loan quantum of 90% also means you have to pay more interest for your HDB financing.
That is also the main reason why the cash portion collected when you sell your HDB flat is always lower as the bulk of the cash proceed are paid to your CPF due to the higher loan and a higher accrued interest for the financing of the HDB flat.
But sometimes HDB may not actually loan up to 90%. The reason behind is, HDB will use up all our saving under your CPF Ordinary account first before financing the balance amount of the purchase price.
The HDB concessionary loan finance as follow:
Example you have purchase a flat of $500,000 and your CPF Ordinary Account balance at $180,000
Initial down payment: $5,000 cash plus $45,000 CPF = 10% downpayment
Subsequent, HDB will utilize your balance $135,000 CPF Ordinary Account Balance.
The final loan amount HDB concessionary loan granted is ($500,000 – $50,000 – $135,000) = $315,000 which is equivalent to 63% of the HDB purchase price.
Whereas, Bank finance up to 75% of the HDB purchase price but you can either take the maximum loan, allow the bulk of your CPF savings earn a higher interest rate sitting in your CPF Ordinary Account and slowly utilize your CPF saving servicing your monthly instalment.
- Interest rate for the HDB loan
HDB concessionary loan has always been maintain at 2.60% per annum although under the HDB indicates that it is 0.10% above the interest rate pay-out under the CPF ordinary account.
During the bad times where interest rates are high, HDB 2.60% per annum seems attractive but it may not be so since the last decades.
Banks and financial institutions seem to realise, in order to attract the HDB owner to take up a HDB loan from them, they have to offer a more superior rate that HDB.
HDB loan default rates are very low as the loan ticket size is small and the loan tenure is as long as 25 years.
Some banks actually offers interest rate capped at 2.60% per annum after the promotional interest rate expires.
So what are the visible saving for taking bank loan.
Current DBS offers 2.00% per annum fixed for 5 years.
Let’s take $400,000 for example
The difference of interest per annum between HDB and bank loan is $400,000 x (2.60% – 2.00%) = $2400 per year
Therefore over a 5 years period base on simple calculation, HDB owner may potential save $2400 x 5 = $12,000 over 5 years period
Most owners may not realise, it may seems small saving per year but it will add up substantially over the years. Don’t forget your loan size is not big at all.
Act now, call us now to find out how we can help you save the interest that you pay for the housing loan.
- Is it advisable to pay by your saving from your CPF Ordinary Account
HDB concessionary loan leaves you with no option from the start as HDB will utilized all the saving in your CPF Ordinary Account and finance the rest.
The moment your CPF is withdrawn, CPF will charge you 2.50% per annum compounding for any CPF withdrawal. Therefore, if you take HDB concessionary loan, right from the beginning, you will incurred withdrawal interest for using bulk of your CPF.
Subsequently, as you do not have any CPF saving in your CPF Ordinary Account, you can merely rely on the monthly salary CPF contribution which will only end up with approximately 65% of the monthly contribution to your CPF Ordinary Account. If the CPF is insufficient, you need to make partial cash to pay for your monthly instalment.
This is the reason why a large portion of HDB homeowners, when they sell off their HDB after 5 years MOP period, the cash portion that they received is very little, usually less than $100,000. The main reason is all the CPF withdrawal is building up 2.50% per annum compounding up every year.
The ironical part of the reasoning is still using saving from CPF Ordinary Account is still a good way to repay your monthly instalment thus build up your cash saving.
Your savings in the CPF Ordinary Account will earn between 2.50% – 3.50% interest per annum. This interest will build up month to month as your monthly salary CPF contribution may be sufficient to pay the monthly instalment and the balance CPF will still earn 2.50% – 3.50% interest per annum.
You will have a small CPF withdrawal accrued interest and CPF usage, thus the cash portion will be higher at the point of sale.
Call us and we will share with you this great saving and at the same time identify the most attractive Bank loan packages for your HDB financing.