A Comparison between HDB loan and Bank loan for your new BTO

As most of us would know, HDB charges around 2.5% for their loans while we can find a lower rate by taking a bank loan despite the risk of fluctuation in interests. Here is a list of offers we can get from a bank loan. In most of the cases, the difference between both HDB loans and bank loans is about 1%+. Never forget that the extra 1% is paid monthly and it will compound for years. 

The main difference in terms of payment will be its down payment. You can choose to pay 10% of your HDB value using CPF if you are taking a HDB loan or split them into two 5%. In bank loan, you will have to pay 15% of your HDB value with CPF while paying 5% with cash. Below are two scenarios to look at:

1.     Couple A is evaluating on which loan to take for their new HDB flat. They would like to know the amount they can save by taking a bank loan instead. Below is an illustration:

Yes, at pure glance the couple can save around $13,000 at the end of the debt. This is taking that the bank loan averages around 1.35% (assuming there are fluctuations in the interest rates). However, there are still considerations not shown in the illustration.

·        Under bank loan, the extra $34,000 of CPF money paid in 2017 will not be earning the CPF interest (2.5%) as compared to the HDB loan option, where your $34,000 still sits in CPF OA account. That will amount to a difference of more than $2,500 over the 3 years till 2020 before your CPF gets whipped off.

·        Under bank loan, the extra cash payment of $17,000 in 2020 means you will have less cash on hand. If you are an investor, you can grow $17,000 over the long period of paying up your loan.

·        Taking these factors into considerations, couple A can save about $10,000 or less by taking up a bank loan. Of course, with some risks by doing so.

Now, let us take a look a couple B:

2.     Couple B is also looking at the same comparisons. The only difference is that they are also investors.

·        Couple B’s illustration will be the same as couple A’s shown above.

·        We take it that couple B’s rate of return in their investments is about 5% annually as seen above. By taking a HDB loan, they can make use of the extra 17,000 cash on hand to invest over the 12 years loan payment period. At the end of the 12 years period, they will be able to beat the difference/saved  amount of $13,173 shown in the earlier illustration. We have to note that this is a mere calculation of dividends returns. There are still stock price appreciations to account for.

·        Moreover, by taking HDB loan- Couple B is able to enjoy the CPF OA interests of 2.5% from the less CPF money forked out for down payment in 2017.

     From the two illustrations, it is obvious  that there are more considerations to think about when it comes to financing a new flat. Savings are not solely reflected on the difference between loan interests and there are deeper factors to dive into. Ultimately, the 2 scenarios showed that good investors can not only enjoy beating the bank loan savings, they can also at the same time earn better returns while taking HDB loan and with a greater peace of mind!