HDB concessionary loan has been my default choice to finance my mortgage as it is the supposedly “safer” option, compared to a bank loan. In this entry, I’ll share the reasons that made me switch to taking up a bank loan instead.
Why was HDB loan my default choice?
Stability
The main reason I opted for HDB loan initially was because of its stability and predictability. HDB loan interest is fixed at 2.6%, pegged at 0.1% above OA rates. On the other hand, bank loan interest rates may be more volatile.
Security
There is also a sense of security when your lender is a government agency. HDB may be less zealous to evict me if I can’t pay the mortgage.
Inundated by choices
To a certain extent, choosing the right plan amongst the sheer range of bank loan packages (fixed rate, fluctuation rates, different banks, clauses, providers etc) is a turn-off for most.
To avoid making the wrong choice, there is a tendency to stick to the safest, plain vanilla 2.6% fixed-rate-for-life HDB loan.
Flexibility
Once we choose to take up a bank loan, we cannot switch back to HDB loan. Choosing HDB loan allows us the flexibility to make a switch in future.
The drivers for change
Conditions seems optimal to take up a bank loan now.
Competitive rates
You may have read the news that interest rates are going to be kept low for some time due to the current economic situation. Bank’s mortgage loan can be as low as 1.5% pa. This is 1.1% lower than HDB’s current mortgage rate of 2.6%! The compounded savings could be substantial in the long run.
Relatively long lock-in period
The lock-in interest rate period can be up to 5 years. This gives me the stability I needed.
Stability
Some bank loan packages are now pegged to the bank’s Fixed Deposit rates instead of SIBOR – which can be more volatile. For example, the loan package that I switched to is pegged to 24-month fixed deposit rate. This rate is published on the bank’s website, making it very transparent to its customers.
Besides, I am of view that the bank also has an interest to keep FD rates manageable.
Back-up/ Risk Mitigation Plan
There are other updated features of bank loan which may help mitigate its risks, such as the option to refinance once for free and also the flexibility to pay off loan early without penalty. Please note that this differs across the loan package provided by different banks.
Should there be a spike in interest rate after the lock-in period, I can choose to pay the loan partially or fully with my CPF OA, which would have accumulated over the years.
Closing
As everyone’s circumstance is different, please be advised to do your due diligence because the switch from HDB concessionary loan to a bank loan is irreversible.
To find out the amount you can possibly save by switching to bank loan, check out the free mortgage calculator.
