The Drawbacks of HDB Loans

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The Drawbacks of HDB Loans

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1. No saving left in your CPF (Central Provident Fund) Ordinary Account

2. Possibly relatively higher interest and opportunity cost







All the balance in your CPF Ordinary Account up to the valuation limit, if applicable, must be utilized first, before you are allowed to take a HDB loan,

Then, HDB will decide on the loan quantum based on the outstanding amount to be paid for the flat.

1.No saving left in your CPF (Central Provident Fund) Ordinary Account







• You lose any interest earning after you use the savings to pay for the flat, as the savings in the CPF Ordinary Account generate an interest, which has remained at 2.5% p.a. since July 1999.

• However, you save on the interest payable for the HDB loan which is 0.1% above the interest rate for the Ordinary Account. In other words, the loan rate is 2.5% + 0.1% = 2.6% p.a.







Once you utilized the savings in the CPF Ordinary Account, you would have to use the loan.

What Is The Exact Loss?

• CPF Ordinary Account Saving = S$50,000

•Interest earned at 2.5% p.a.= S$1,250

• Interest payable on loan at 2.6% p.a.= S$1,300

• Loss = S$1,300 – S$1,250 = S$50







Nevertheless, it is still possible than you would have been better off if the saving had remained in the Ordinary Account, How?

Because the first S$60,000 in all the 3 CPF accounts (Ordinary, Special and Medisave) earns an additional 1% interest, with up to S$20,000 from the Ordinary account.







If you rely on the balances in your Ordinary account to make up the S$60,000, you forfeit this additional

1% of interest.







A simple illustration using the maximum amount of S$20,000 That can earns the additiona1 interest in the ordinary account

Loss from using your CPF balances instead of the HDB loan:

Interest Rate Loss = 3.5% (interest in CPF Ordinary Account) - 2.6% (interest on HDB loan) = 0.9% p.a.

Annual Loss = 0.9% x S$20,000 = S$180







Further, when the flat is sold, all CPF savings used and interest that would have been accrued if the sum had remained in the account, will be deducted from the sales proceeds, and refunded to the Ordinary Account

This will reduce the cash proceeds which you may need for other purposes. Anyhow, if you had financed the flat with a loan (bank or HDB), you would still need to repay the outstanding loan amount from the sales proceeds.







Another Drawback Of Depleting Your CPF Ordinary Account Savings

In the event of a job loss there might not be adequate balance to service the monthly home loan repayment; hence you may be required to service it

with cash.







How to circumvent the use of CPF Ordinary Account balances to pay for the flat?

Just, invest it before you make the flat purchase

You can do so for the savings in excess of S$20,000 under the CPF Investment Scheme - Ordinary Account.

Or instead you can transfer the monies in your Ordinary Account to the Special Account which interest rate has remained at 4% p.a from 2000 till now.







• Just note that this transfer is irreversible and there is a limit to it - the balance in the account after the transfer cannot exceed the prevailing Minimum Sum.

• Once the monies are in the Special Account, you cannot utilize it for your housing purchases anymore.







2. Possibly relatively higher interest and opportunity cost

• During a high interest-rate environment, a financing institution offers a loan with a lower interest rate,as compared to a HDB loan.

• So the opportunity cost for not using a private loan becomes higher.

• In addition, you also lose the 1% of additional interest on the savings (capped at S$20,000) in your CPF Ordinary account.







Whether you decide on a HDB loan or a bank loan,

you are not allowed to refinance to a HDB loan once you have taken a bank loan.







About Property Buyer Mortgage Consultants

Property Buyer Mortgage Consultants is a research focused independent mortgage broker. We emphasize a consultative approach where we match our client’s financial situation with the best fit mortgage loan, not simply a cheap loan.

We also help property buyers in their buying process helping them avoid pitfalls from unscrupulous property agents. (We are not property agents, therefore there is no conflict of interests.)

We also developed our proprietary home loan reporting tool which provides amongst other things, 23 years Sibor history as well as 6 years worth of SOR.

Our service is free to you as banks pay us a commission on loan deals completed. Banks in turn save on staffing cost as we are not on their payroll. www.PropertyBuyer.com.sg/mortgagewww.SingaporeHomeLoan.netwww.iCompareLoan.com/consultant/




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The Drawbacks of HDB Loans