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3 Policy Changes That Would Seriously Improve the HDB Loan

The HDB concessionary loan is supposed to make housing affordable – an objective it fulfilled until interest rates plunged. Then suddenly, the interest on a HDB loan rose way above that of a bank loan. It’s a flaw that needs correcting, and it probably shouldn’t have carried on for almost 10 years. Here’s our opinion on the tweaks needed:

 

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Does the HDB Loan Make Housing Affordable?

The big advantage of a HDB loan is the down-payment. You only need to put down 10% of the flat’s price (minus any Cash-over-Valuation). A bank loan, however, requires at least 20% down. Down payments for a HDB loan can also come from your CPF, whereas the bank requires cold, hard cash.

So far so good. The problem is with the loan interest rates:

The typical bank loan has an interest rate based on an index, such as SIBOR, plus the bank’s spread (an additional amount that differs between banks). So as SIBOR moves up or down, the loan’s interest rate will fluctuate accordingly. At present, the rate is around 1.7%.

(If you want to check the banks’ different interest rates, you can do it for free on SmartLoans.sg.)

The HDB loan has an interest rate based on the prevailing CPF interest rate, plus 0.1%. At present, that’s around 2.6%. So yes, the HDB loan charges you way more interest.

We think some improvements are in order:

  • Peg Interest Rates to Household Income
  • Simply Lower HDB Rates in Prolonged Low Interest Environments
  • Offer a Low Interest Reno Loan Complement

 

1. Peg Interest Rates to Household Income

When you buy a HDB flat, your various housing grants are based on your household income. So it’s beyond us why HDB interest rates aren’t.

Rather than use the CPF interest rate, we should use a progressive system. The HDB loan rate will increase along with the average household income. For example:

Household Income – $2,000 or under (0.9%)

- $2,001 to $4,000 (1.2%)

- $4,001 to $6,000 (1.7%)

All numbers are speculative, but you get the idea. The financial burden varies according to what each family can handle.

 

2. Simply Lower HDB Rates in Prolonged Low Interest Environments

When banks charge less interest than the public housing board, it always looks a bit ridiculous; like a soup kitchen charging more than the restaurant next door.

But you know what? We’d actually say that’s okay if it was a short term thing. If the bank rates dip below HDB rates for a year or two, we’d be the first to shrug and say hey, you win some, you lose some. That’s the bank borrower’s reward for taking a more volatile option.

But bank rates have been far lower than HDB rates for almost a decade. In this prolonged low-interest environment, HDB’s higher rates are just helping to further divide the wealthier borrowers – who can afford higher down-payments and qualify for bank loans – from the poorer ones.

HDB should devise a policy for lowering its interest rates, should a low interest environment persist for five years or more.

 

3. Offer a Low Interest Reno Loan Complement

Unless you subscribe to the Ryan Ong School of Interior Design (i.e. the ideal placement for anything is where it lands when I throw it on the floor), you’ll want some furniture and stuff.

That’s why after getting a HDB loan, most home owners go right out and get a $30,000 renovation loan. It’s kind of a necessity for some, so HDB should have its own low (or dare we say NO) interest renovation loan. This should be an option for lower income families, who don’t have much credit left after taking on a home loan.

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