More choosing HDB loans on fear bank rates may rise

Tighter lending rules may have also made them more appealing: Experts
By Janice Heng, The Straits Times, 30 Aug 2014

BANK loans may have lower interest rates than Housing Board loans at the moment, but the fear that rates may rise has prompted more flat buyers to opt for the board's fixed concessionary loans.

Tighter home loan rules may have also made HDB loans more attractive, said experts.

The latest data from the HDB shows more buyers taking loans from it - 94 per cent of loans granted for new flats were from the HDB in the first seven months of this year, up from 92 per cent last year and 91 per cent in 2012.

Similarly, more buyers of resale flats have been taking up HDB loans over bank loans.

In the first seven months of this year, concessionary HDB loans formed 38 per cent of loans granted for resale flats. It was 27 per cent last year, and 24 per cent in 2012.

The growing popularity of HDB loans comes despite bank loans' lower interest rates. With global interest rates at a low, bank home loan rates start from around 1.2 per cent to 1.8 per cent. In contrast, the HDB concessionary loan rate - fixed for the loan's tenure and pegged at 0.1 per cent above the prevailing CPF interest rate - is now 2.6 per cent.

But buyers may prefer HDB loans as they know that low bank rates will not last, said experts.

"Although bank interest rates are currently lower than HDB interest rates, buyers are recognising that (bank interest rates are) due for an increase and may want the 'certainty' offered by the HDB loan," said SingCapital chief executive officer Alfred Chia.

The HDB itself warned that the low global interest rate environment will not last indefinitely.

"Hence, we advise flat buyers to take a long-term view, understand the loan terms offered by HDB and different banks, and assess the monthly loan repayments based on different interest rate scenarios," said a spokesman.

The fear that rates will rise is why engineer Mohd Hazri Zaini, 31, is taking an HDB loan. "With interest rates (being uncertain) like this, I'd rather not jump into a bank loan," said the buyer of a three-room resale flat.

But DBS Bank has seen more resale flat buyers coming to it for home loans since it launched the POSB HDB Loan option last year.

The loan has a floating interest rate that is capped at 2.5 per cent for the first eight years, for a "balance of flexibility and security".

Another reason people are opting for HDB loans is that the down payment for flats using such loans can be made entirely with Central Provident Fund savings. But a bank loan requires some cash for that, noted Century21 CEO Ku Swee Yong.

"Younger couples (who buy new flats) have less cash savings so they simply go for HDB loans."

Another possible factor for bank loans' decreasing popularity is how much of a home buyer's monthly income can be used to service a mortgage.

Previously, with no such caps, banks granted loans even if repayments took up as much as 60 per cent of income. Last year, the Government capped the mortgage repayment ceiling at 30 per cent.