Is HDB Loan Refinancing a Good Idea?

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If you are reading this article, you’d probably have already taken an HDB loan for your house, but are now wondering whether you made the right choice. You want to know if refinancing an HDB loan with a bank loan is worth the effort. Don’t worry, we have the right information for you! Let’s first look at the pros and cons of both kind of loans:

Advantages and disadvantages of HDB loan

The key benefits of taking an HDB loan are:

  • This would have less stringent terms because it’s a government-supported loan.
  • The down payments would be low – you need to pay only up to 10% of the house’s cost.
  • You can make partial or full prepayments without any additional fee.
  • The interest rates on HDB loans haven’t changed much in years. This means that the Equated Monthly Instalments (EMIs) would stay stable and you can plan your finances well.
  • If EMIs are not paid on time, the applicable late payment charges are just around 7.5% of the amount per year.
    You have the option to defer payments for a few months in the event of a job loss or a financial obstacle.

The main disadvantage of an HDB loan is that your loan tenure cannot be longer than 25 years. If you want a longer tenure and smaller EMI, HDB loans aren’t an ideal product for you. Apart from this, there are several eligibility-related terms of HDB loans, but that is not pertinent to the topic.

Related: What You Should Do About Your Home Loan if the SIBOR is on the Rise

Advantages and disadvantages of bank loan

Let’s look at the benefits of a bank loan in comparison with HDB loans:

  • Banks might be able to offer you more varieties of interest options – such fixed rates, floating rates and variable rates – as well as better interest rates.
  • Bank loan tenures can go up to 35 years, depending on the down payment and the loan amount.

The points where bank home loans are not very attractive are:

  • Most banks will need you to pay a prepayment fee if you make partial or full prepayments.
  • If your EMIs are delayed, you will have to pay around S$50 every time there’s a delay.
  • Bank terms and conditions are bound to be stricter than those of an HDB loan, and their recovery procedures won’t be very accommodating.
  • If you have chosen a variable or floating or hybrid interest rate, your EMIs would change very often. This adds an element of surprise and instability to your financial planning.

You may also like: Switching Home Loans – Why Do It?

When does HDB loan refinancing make sense?

Before you decide to refinance your HDB loan with a bank, ask the following questions:

  • How much will you save every month? Is the EMI lower?
  • What is the effective interest rate on the refinancing option? Is it attractive enough for you to switch and save in the long term?
  • Will you be able to get a longer tenure with the bank (if that is what you are looking for)?
  • Are the fees – late payment, prepayment – lower with a bank than with the HDB?
  • Is there a lock-in period that will prevent you from making early settlements, refinancing or selling the house?
    What is the difference in repayment schedule?

Depending on your answers to the above questions, you can decide whether you should refinance your HDB loan or not. We suggest that you refinance your HDB loan with a bank if the EMI and effective interest rate on the bank loan are lower, and you would be allowed to make prepayments without incurring additional charges. However, remember that you won’t be able to switch back to an HDB loan once you refinance it with a bank loan, and banks will be stricter in enforcing your payment obligations.

Let’s illustrate this with the POSB HDB Loan, which offers:

  • A maximum interest rate of 2.5% for the first 5 years, which is 0.1% p.a. lower than the current HDB
  • Concessionary Loan rate.
  • No prepayment fee
  • Minimum loan of S$100,000

According to POSB, you could save between S$2,374 to S$9,940 per year by choosing to refinance the HDB loan of S$500,000. However, after the first 5 years, the interest rate would revert to a floating rate based on the DBS benchmark rate, which might make the loan costlier later if the benchmark rates go up. If you’re ready to take this risk, then refinancing with the POSB HDB Loan could be an attractive option for you.

The bottom line? Stick to your HDB loan if you want to take less risk and prefer stability. But if you’re willing to take moderate risks and experiment, and if the bank is offering lower interest rates than your current HDB loan, then go ahead and refinance your home loan with a bank.

Would you consider refinancing your HDB loan? Let us know your thoughts in the comments below.

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