Here is the response from the SeedlyTV BTO Special (50:45 to 54:36)
"Two questions all right, so the first part I'm gonna answer is, do you recommend a bank loan or HDB loan if I'm planning to sell the BTO of the MOP.
So for those who are unfamiliar with what MOP is that's the Minimum Occupation Period. So right now HDB stipulates that it is five years. So for the first five years of you taking your keys, you have to stay in the flat, like you cannot sell it, or do anything, you need to like literally live in that home.
So would I recommend a bank loan or a HDB loan if I'm trying to sell to BTO? Okay so I think it really depends.
So like I mentioned earlier if you are very comfortable with dealing with the variable rates of the bank loan, which would usually be much lower than your HDB loan, then the bank actually makes more sense.
But with a bank loan right, you will also have to deal with this thing called an early repayment fee.
So the banks earn money by lending you money and it's obviously in their interest that you borrow that money for as long as possible so you keep getting an interest.
But for me, I would obviously want to pay as fast as possible yeah correct because I don't to pay the interest. Yeah so that's the difference now.
So let's say if I'm HDB and you come to me, and then two years later if you're going to buy a Toto or 4D and then you strike it. You strike it, and you can basically pay down the whole thing and then you don't deal with your flat anymore. Yeah you can go HDB and then you just pay, and then they'll say "Okay good job. The flat is yours, you can go and do whatever you want." Like HDB is not going to charge you any early repayment. Yeah so good job, financially free, Seedly approved.
But for a bank loan, it's different.
Okay because the banks need to earn money, and the only way they can do it is if you hold that particular loan all the way to its tenure, and then you keep paying them the installments and then the interest and stuff like this
So obviously if you want to pay early then what you need to do is you have to
pay usually about 1% to 1.5% of the undispersed loan amount
So here I repeat again, so if I borrow $5 from a bank and then I only use this first $2, so the undispersed is $3. So $3, I need to pay 1% of that $3 to the bank in order to say "Okay I'm gonna sell this flat, so this will be considered an early repayment."
Okay so this is something to think about when you're deciding between bank loan or HDB loan, especially if you already make up your mind that "Okay I'll just hold this five years then sell."
Okay with the HDB loan, you're basically loaning money from your CPF and you will need to return your CPF monies plus any accrued interest.
And there is a calculator online on HDB side to figure out how much you will actually have to pay back. And yeah maybe that should be able to answer that question, so if you want to know for sure how much then you can find out."
Hope this helps!
2 more comments
11 Oct 2020
Hello, this is a great post! I would like to also jump in to ask if one needs to pay back accrued interest on top of the mortgage interest I paid to the bank/hdb loan when I sell the house? (I know that accrued interest needs to be paid on what we withdrew from OA before the loan amount is borrowed. In this question, the focus is on the bank loan and not on the amount withdrawn). This scenario assumes that if you didn’t buy the property, you don’t need to take any loan and you would have earned the 2.5% accrued interest on the deposited amount. Thank you in advance.
11 Oct 2020
Hey Darren, as long as you didn't use cpf to repay the bank loan borrowed, you don't need to return accrued interest to cpf. For example, you could repay your monthly mortgage in cash. If you decide to switch the bank loan mortgage payment to cpf in future, then accrued interest would start being computed on those OA amounts used.
I think you are a bit confused about how CPF repayment works. No matter whether you are using bank loan or HDB loan, upon sale of the flat you will have to pay back to CPF any amounts you had drawn down from your OA. By this logic, if you had used cash to service your loan (be it HDB loan or bank loan), then there is no need to pay back anything to your CPF upon sale.
As for the remaining loan amount still owed to the lender, be it HDB or bank, the sale proceeds will be used to settle that amount owed. So naturally, that portion will not be credited to your OA, because it belongs to the lender. Not sure if I understood your question correctly.
Now back to your original question on whether to use HDB loan or bank loan. In the current environment of absurdly low interest rates, it makes a lot of sense to take up a bank loan as most bank loan interest rates are quite low nowadays. This is especially more relevant in the first few years of repayment, given that interest repayment is a high portion of the total monthly payment. That said however, it is important to consider the difference in upfront down-payment (10% for hdb loan vs 25% for bank loan). If one doesn't have the required capital, then there is no choice but to go for hdb loan as a start. If liquidity is not a concern, then bank loan would be a really good choice.
Hope this helps!