Switching From HDB Loan to Bank Loan to Take Advantage of Low Interest Rate? Here Are 5 Practical Things to Consider First

Come July 2020, some of our favourite bank accounts are lowering their bank deposit rates.

Those accounts include OCBC 360, Standard Chartered JumpStart, and CIMB FastSaver.

The falling rates are on the back of the US Fed cutting its interest rates to near zero.

Switching from HDB loan to a bank loan to take advantage of the low interest rate has surely gained some interest of late, as seen from questions asked in the Seedly Community.

It’s not just the Seedly Community, but talks are rife in Facebook communities and blogs about refinancing from an HDB loan to a bank loan.

However, before we get all too excited and jump on the bank loan bandwagon…

We should understand that the lower interest rate is not the only thing to consider.

There are also other important aspects to think that may not be widely discussed.

TL;DR: Refinancing Your HDB Loan to Bank Loan? You Should Consider These First…

Some things to consider before making the switch to a bank loan:

1. The more commonly-covered considerations are the lock-in period involved, any partial prepayment penalty to take note of, and the costs such as legal and valuation fees involved.
2. The more practical things to consider would be things like how secure is our income, do we have an emergency fund already set up, do we have any buffer in our CPF OA, are we a risk-averse person, and whether we have run through our thought process with the flat co-owner.

Let’s Talk About The Widely-Covered Stuff

Some of the general things to consider before making the switch are:

1. Lock-in period
2. Repayment penalty
3. Other costs involved

Let’s cover them quickly to give a more well-rounded discussion.

Lock-in period

A lock-in period is where you can enjoy a special interest rate for a certain number of years.

If you plan to sell your house within this lock-in period and pay off your home loan in full, there might be an exit penalty involved.

So, be sure to check this out with your bank, and whether that will affect any future plans you have in mind for your home.

Partial prepayment penalty 

For HDB loans, there isn’t any penalty for paying back the mortgage off early or paying more than your monthly instalment.

However, when it comes to a bank loan, paying early can result in a prepayment penalty.

Usually, banks charge 1.5% of the amount repaid.

Other costs involved 

There are costs involved when switching from HDB loan to a bank loan.

For example, there will be legal fees and valuation fees to fork out.

Also, between you and your spouse, if you will be the only one paying for the monthly instalment and you wish to add your spouse in as a co-payer in the future, you may need to pay an administration fee to the bank.

Now, Let’s Consider the More Practical Stuff  

Other than what we have briefly mentioned above, we should ask ourselves some practical questions, which could be more critical than those covered above.

Those practical questions are:

1. How secure is my income?

2. Do I have an emergency fund set up?

3. Do I have any buffer in my CPF OA?

4. Am I risk-averse or risk-taking?

5. Did I discuss with my spouse? 

1. How Secure Is My Income? 

In my opinion, one advantage of sticking to HDB loan is that the HDB is likely to be more lenient when homeowners are hit with a loss of income and are unable to pay their instalment.

However, this will not be the case when it comes to the banks. The repercussion of not paying your loan would be much higher.

Therefore, I think a significant consideration is whether your income is secure.

If you are in a job where the income level may fluctuate, or you work in a gig economy (for instance), it may be better to stick to an HDB loan.

On the contrary, if you are a full-time employee in a stable company, then it might make sense to consider switching to a bank loan.

The fragile nature of some work has come to light during the COVID-19 pandemic. So, it might be worth taking some time to reflect upon our income stability.

2. Do I Have An Emergency Fund Set Up?

Let’s say you have decided to make the switch, the next thing to consider would be whether you have an emergency fund ready.

This fund would come in handy during unforeseen circumstances such as a job loss.

As a rule of thumb, we should have rainy day funds of three to six months of our monthly expenses set aside (amount varies according to circumstances).

The monthly expenses include things such as food expenses, transport costs, electricity bills, on top of the mortgage loan payments.

Since nothing is permanent in life, even if we lose a so-called secure job, the emergency fund can kick in to continue paying the monthly instalments until we find another source of sustained income.

3. Is There Any Buffer In My CPF OA? 

For those who don’t wish to fork out cash for the monthly loan instalment, there’s an option to use our CPF OA.

Similar to the concept above, we can also make sure we have build up a buffer in our OA first to tide through any unforeseen circumstances like a job loss.

For example, if the monthly loan instalment is $1,000 and we have $10,0000 in our CPF OA, without any new CPF monies coming in, the CPF OA amount will last 10 months.

As for the exact amount required, we can have three to six months of monthly loan payment or a bigger amount that we deem necessary.

4. Am I Risk-Averse or Risk-Taking?

The HDB loan’s interest rate stands at 2.6% while a bank loan’s interest rate is 1.5%, for example.

We can save the 1.1% in interest rate by refinancing our HDB loan to a bank loan.

However, those of us who are extremely risk-averse and think HDB loan is the “safer” way to go, we can’t put a price for the peace of mind we get from sticking to an HDB loan.

And remember, switching over from an HDB loan to a bank loan is a one-way street.

Therefore, we have to decide wisely.

5. Did I Check In With My Spouse? 

After going through all the lone decision-making, we are left with one (hopefully) last thing to do.

Assuming you (the husband) co-own the house with your wife, it would be gentlemanly to run through with her what you have researched on before fully deciding to make the switch.

As they say…

“A happy wife is a happy life!”

Want to Discuss Further on HDB Loan vs Bank Loan?

Be sure to check out the Seedly Community and participate in the lively discussions!