How much can you save by refinancing your HDB loan?
If you are a first-time HDB Build-To-Order (BTO) flat owner, chances are that you took up an HDB Concessionary Loan. After all, with the lower cash down payment requirement and convenient application process, it’s the default option that most Singaporean HDB buyers opt for.
But with interest rates so low, should you look into refinancing your HDB loan? Refinancing may be a good idea to save some money, especially if you intend to stay in the same flat for a few more years. With banks currently offering a lower interest rate than the HDB Concessionary Loan, refinancing with a bank loan might actually bring you significant cost-savings.
|HDB Concessionary Loan||POSB HDB Loan|
2.6% p.a.Calculated from CPF Ordinary Account interest rate (2.50% p.a.) + 0.10% p.a.
|1.50% p.a. fixed interest for first 5 years|
|Early repayment||No penalty||No penalty|
|CPF usage||For monthly repayments||For monthly repayments|
When should you refinance your HDB loan?
1) When interest rates are lower
Lower interest rates means more disposable income, which you can channel into your savings, retirement fund, or even for future travel plans. So, if you don’t intend to move to a new place anytime soon, refinancing could be a good way to save some money.
2) When your financial situation has changed
If your financial situation has changed and you are looking to increase or decrease your loan tenure, take note:
- Shortening the loan tenure allows you to clear off your loan faster, say with lower interest rates and similar monthly instalments.
- Lengthening it lets you lower the monthly repayment, thus easing your cash-flow. One thing to note is that lengthening the loan tenure may lead to an increase in the overall amount that you pay.
When might refinancing be a bad idea?
Refinancing might possibly be a bad idea under these few circumstances:
- Situation 1: You somehow switch to a loan with higher interest rates
- Situation 2: There are penalties to repaying your loan early
- Situation 3: There are expensive switching costs when you refinance
It is unlikely that you choose to refinance to higher interest rates. And with a HDB loan, there are no early repayment penalties. So, that leaves us with Situation 3: expensive switching costs when you refinance.
If you’re switching away from a HDB Concessionary Loan, you’ll want to focus on the legal and valuation fees that come with the territory. Banks typically offer some rebates and subsidies, so look out for those.
With POSB bank’s Super Saver package, so long as your refinancing loan amount is at least S$250,000, you will receive cash rebates of S$2,000 to subsidise the accompanying legal and valuation fees. Alternatively, you can offset the fees using the cash rewards in POSB bank’s Super Cash Rewards package (cash rewards: at least S$5,000 with a minimum refinancing loan amount of S$200,000).
How much cost-savings can you achieve?
The cost-savings you can achieve by refinancing from a HDB Concessionary Loan to a bank loan can be significant.
Taking a loan amount of S$300,000, switching to a POSB fixed rate loan of 1.5% p.a. saves you interest of 1.1% each year. That translates to cost savings of S$156 each month, and adds up to S$9,404 after five years. That is no small change.
Cost-savings come in additional forms when you’re switching from a HDB Concessionary Loan to a bank loan. That’s because some banks offer add-ons that will are particularly useful with COVID-19 having taken a toll on many industries and jobs, such as:
- Mortgage insurance. For example, you get complimentary insurance coverage for 6 months with the POSB HDB Loan. Should you lose your job or be faced with an unfortunate event, the Home Payment Care feature helps to cover 3 monthly home loan repayment (capped at S$2,500 per month), or pays up to S$30,000 in lump sum benefit.
- Option to reprice. For example, you can reprice your home loan after 12 months of getting your POSB HDB Loan, which is particularly useful if interest rates move lower than 1.50% p.a. If that happens, you have the option to reprice to the lower rate at no cost – it’s free!
- Waiver of commitment fee. For example, you will not have to pay a commitment fee (typically 1.5% p.a.) even if you sell your HDB flat within the loan lock-in period of five years. So you won’t have to worry about incurring any additional costs if you sell your property within the next five years.
More reasons to refinance: Boost your savings interest rates
Refinancing your home loan with POSB allows you to earn even more on your savings, if you have a Multiplier account. Here’s how.
Let’s say you are already crediting your salary into a POSB/DBS account, and spend S$500 on your credit card every month. At this stage, you qualify for 1.60% p.a. interest rate on the first S$25,000, and 0.05% p.a. on the next S$25,000 in your Multiplier account.
By switching your home loan to POSB, it allows you to earn 2.20% p.a. on your S$50,000 account balance, which works out to S$690 more a year, and S$3,450 more in five years.
While it may be convenient to let your HDB Concessionary Loan run its course, it isn’t the most financially savvy move. A quick back-of-the-envelope calculation will reveal some very practical cost savings through refinancing. Our advice? Do the math and make your savings count.
Deposit Insurance Scheme
Singapore dollar deposits of non-bank depositors and monies and deposits denominated in Singapore dollars under the Supplementary Retirement Scheme are insured by the Singapore Deposit Insurance Corporation, for up to S$75,000 in aggregate per depositor per Scheme member by law. Monies and deposits denominated in Singapore dollars under the CPF Investment Scheme and CPF Retirement Sum Scheme are aggregated and separately insured up to S$75,000 for each depositor per Scheme member. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.