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    HDB Loans vs Bank Loans

    If you are looking to purchase a home in Singapore, the question of whether to get a HDB loan or a Bank loan might often strike your mind. Both these types of loans have their own set of advantages. It goes without saying that although home loan interest rates in Singapore are lesser in comparison to many countries in the world, the price of real estate remains starkly high. Singapore is one of the costliest real estate markets in the world with the costs involved in owning a home being quite significant actually. Coming back to the question of what type of loan will best suit your lifestyle demands, well, let’s find out!

    What is a HDB Loan?

    Before we move on to make a comparison, let us individually understand these types of loans. First, the HDB Loan.

    The Housing Development Board of Singapore offers loans to citizens of Singapore to enable more citizens to get their own homes. However, these loans are different from home loans offered by banks in Singapore. HDB loans have different features and in fact, are more advantageous than conventional bank loans. Let’s find out why!”

    HDB loans offered to Singaporean citizens are a government-regulated initiative. This means that HDB’s loan programme is meant to particularly target Singaporean citizens who find it difficult to expend on a real estate property owing to inflated real estate prices. This automatically means that not every citizen becomes eligible for a HDB loan. Just like how home loans have their eligibility parameters, HDB loans have eligibility conditions too. Loans are only disbursed if these eligibility parameters are met.

    Understanding how an HDB loan works in Singapore

    The main eligibility criteria for HDB loans in Singapore is the income. HDB loans aren’t available to all Singaporean citizens. It is only available to citizens who fall under a particular income bracket. This is mostly because of the government’s intention to target families that are unable to get their own home owing to large real estate costs. Moreover, several banks have their own income criteria for home loans and many citizens applying for loans with the HDB aren’t quite eligible to apply for home loans with commercial banks.

    If you are single and wish to apply for a HDB loan, your income shouldn’t exceed S$6,000 per month. For families, the total income shouldn’t exceed S$12,000 per month in order to be eligible to apply for a HDB loan. Even for permanent residents, the eligibility parameters are quite stringent.

    HDB loans have a maximum tenure period of 25 years and the loan amount sanctioned depends on other factors like income, credit scores ,etc. Moreover, because HDB loans are a government regulated initiative, you can request for deferral of payments for a certain period of time if your finances take a beating.  Sometimes, owing to certain stringent measures, you might find that a bank loan would work better for you. Let us look at how bank loans function in Singapore and whether they are a better option than HDB loans.

    Home loans in Singapore

    There are several banks in Singapore offering home loans at varied interest rates – interest rates are more or less the same and usually vary by decimal points – banks usually resort to this in order to make their products more competitive. Interest rates are usually below 2% p.a. but the price of real estate, however, is high – well, it definitely compromises the low interest rate. Coming back to home loans as an option over HDB loans, banks offering home loans allow for a larger tenure period.

    The tenure period for home loans can stretch up to 30 years in some cases – this is mostly in cases where a significant percentage of the cost of the home (at least 30-40%) is made as down payment. Home loans have different eligibility criteria depending on several factors including income, credit scores, existing debt, etc.

    A significant advantage that home loans hold over HDB loans is that eligibility parameters aren’t as stringent as in the case of HDB loans. For instance, even for low income households, a smaller loan amount is made available by banks. HDB loans have strict eligibility criteria and individuals or families applying for a HDB loan cannot have ownership over an existing property.

    Types of interest rates offered by banks

    There are basically two types of interest rates associated with HDB loans and bank loans – the fixed interest rate and floating interest rate. Fixed interest rates are those that have an unwavering interest rate over the period of the loan tenure. For instance, if the fixed interest rate on your home loan is 2% and the loan tenure is 20 years, the interest remains fixed throughout your loan tenure. This is advantageous to a great degree as fixed payments give you a good idea of how much you’d be paying and help you manage several aspects of finances effectively and accommodate various other types of investments through prudent planning.

    A floating interest rate is lower than a fixed interest rate as these rates are influenced by market related fluctuations including Central bank interest rates and other macroeconomic parameters which invariably influence rates at which the Central bank lends money to commercial banks.

    Aspects that banks take into account while processing your loan application

    • Your annual income
    • Your credit score
    • Existing loans with the bank/other banks
    • Credit history and instances of loan defaults
    • Income stability and employment stability

    Your annual income

    As mentioned earlier, your annual income forms the basis for banks to decide whether to take your loan application forward or not. Every bank has a minimum income eligibility criterion that has to be met in order to apply for the loan. Larger the requested loan amount, higher the income requirement.

    Credit score and credit history

    If there is one parameter that can result in the rejection of your loan application, it is your credit score. Your credit score is the essence of your credit report and gives banks and other financial institutions an understanding of how you’ve been managing your credit. A good credit score can be really helpful while a bad credit score can result in rejection of your loan application.

    Your credit history is part of your credit score and highlights instances of late payments on credit card bills and defaults on credit card payments or existing loans. Other parameters that form part of your credit score include the total amount of debt in your name, types of credit you’ve used in the past, and the percentage of credit you’ve used against the total available (collective) credit limit - this is mostly in case of credit cards.

    Income and employment stability

    Your income/employment stability is a crucial parameter that evinces your ability to make timely repayments over the period of your loan tenure. Having ample years of experience and working with a single company for several years will give banks the impression that you are most likely to be stable as far as your employment status is concerned, preventing instances of defaults or payment deferments resulting from loss of employment.

    Existing loans with the bank/other banks

    Another factor that banks consider before sanctioning your loan is the total amount in debt under your name. If the value of existing loans or your liabilities are too high, your loan application might not get approved. Again, this is only a single parameter and does not single-handedly influence your loan application.  

    You can choose the type of loan depending on your requirements – you’d already know what type of loan to apply for if you look at the eligibility requirements for both these types of loans.  You can visit the official website of banks offering home loans or the official Housing Development Board to apply for your loan.

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