WHY I REFINANCED MY MORTGAGE FROM A HDB LOAN TO A BANK LOAN

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For first-time HDB flat buyers, taking up a housing loan with the Housing Development Board (HDB) would seem like the obvious way to go. Benefits like being able to pay the down-payment through CPF or cash, and being able to loan up to 90% of the purchase price make the HDB loan an attractive option for cash strapped couples and individuals.

As a young couple, my wife and I were no different from many other couples just starting their life together. We started off our first mortgage with a housing loan through HDB to maximise the use of our CPF money and none of our modest nest egg.

But, we have since refinanced to a bank loan, which has helped us gain a surplus in our CPF accounts as our monthly mortgage repayments have dropped. This is possible because with a bank loan, our interest expenses are lower, which results in more interest gained in our CPF Ordinary Account (OA) due to the difference of repayments and less accrued interest to pay back when we sell the house.

Many of our friends, however, were considerably worried for us when we made the switch. From many conversations, we gathered some misconceptions that might deter a more conservative couple or individual from refinancing their HDB flat to a bank loan:

  1. The mortgage rates with HDB are fixed at 2.6%.

    This is not true. It is perceived to be fixed at 2.6% (Ordinary account [OA] + 0.1%), because the OA have remained unchanged at the floor rate of 2.5% for 20 years since July 1999. Prior to that, the OA rates have been hovering above 3%, with a high of 6.5%. There is always a possibility that the rates would fluctuate.

  2. Mortgage repayments with a bank loan have to be in cash

    This is not true. The monthly repayments can be paid using CPF. The repayments are no different from taking a HDB loan.

  3. The bank will repossess the HDB flat if you are unable to pay the mortgage

    This is true, but so will HDB. Both the bank and HDB have the first claim to the property which will enable them to sell off the flat should you default on the mortgage. To prevent that from happening, engaging a financial planner to ensure the health of your finances is highly recommended.

There are pros and cons in taking a HDB vs a bank loan, which will not be covered in this article. The key takeaway is that refinancing your home to a bank loan could help enable to you to increase your CPF balance. The following scenario shows how much savings a couple can achieve by refinancing their mortgage from a HDB loan to a bank loan.

Scenario

John and Sally initially bought a 5 room flat for $450,000, and took a 90% HDB loan of $405,000 for 25 years. They have since paid for 2 years and are deciding if they should refinance. The following table shows their mortgage with the HDB.

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The table below shows a comparison between what they would potentially be paying should they continue with the HDB loan, and if they refinanced to a bank loan instead. Currently, there are some home loan packages from the banks that offer fixed rates at 1.5% (2 - 5 year lock in).

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So, if you’re about to buy your first home with your sweetheart or to live the awesome single life, perhaps it would do well for you to consider what bank loans can offer you instead. While I’m not saying that taking up a loan with HDB is a mistake, refinancing to a bank loan could help give you that extra cushion in your savings in the long run. For me, the amount that I could save was a clear motivator for the switch to a bank loan.

If you would like to find out more on how to refinance your HDB loan, or how else we can grow your wallet, do reach out to us at contact@growingwallets.com.