For the most part, bank loans are about as pleasant as a venereal disease. The only difference is that VD doesn’t pretend to be polite while repossessing your house. So why in the hell would I advocate bank loans? Well, finance isn’t straightforward. That’s why bankers and salesmen have tongues you can use as corkscrews. And truth is, there are situations when a bank loan would make more sense than a HDB loan. Learn to spot the moments:
Which is Better?
I’m going to make a frank statement here: When you ask which loan is objectively better, that’s like me asking a bull fighter “Hey hombre, which hurts worse, the left horn or the right?”
The only useful answer is “Depends where you’re standing at the time”.
Same thing. Depending on your financial situation, there are times when a HDB loan hurts worse than a bank loan. Such as…
1. When You Don’t Need Added Security
HDB loans have a 2.6% interest rate, whereas bank rates are barely above 1%. Even if you pick the worst bank package, you’d still have lower interest than HDB offers. What justifies the difference?
A HDB loan offers greater peace of mind. They won’t take your flat away. But if your job is already stable, what are you paying for?
Drop the “you never know what will happen” mindset, because it doesn’t work. It makes sense to plan for the most probable, not the improbable. If I tried to sell you insurance for meteor strikes or cloned dinosaur rampage, would you buy it?
Same thing. Why take out a higher loan, to guard against something that’s never likely to happen? That’s just as bad as over-insurance. The money you save on a cheaper bank loan could be invested in shares, structured deposits, or self-upgrading; the returns from these are a better form of security anyway.
2. When You Don’t Care to Refinance
Some people don’t like refinancing. Maybe they don’t like book-keeping, or maybe it’s too much effort to spend 15 minutes every three years to check home loan packages.
Whatever. These people will love bank loans; and the banks will love them back.
A lock-in clause typically lasts two years, and imposes a 1.5% penalty for refinancing during that time. This is a problem for people who want flexibility. But if you don’t intend to refinance, a lock-in clause becomes as relevant as Felicia Chin’s opinion.
In fact, a bank’s lock-in might actually work to your benefit: Long lock-in periods are often sweetened by lower rates, whereas a HDB loan won’t give further concessions just for staying on. So if you’re the type to pick a loan and stay with it to the end, a bank loan with low interest and lock-in is the way to go.
3. You Have Cash in Hand
“What’s that? Pay with cash instead of using CPF? That’s just crazy.”
No, no it’s not. What’s crazy is taking a HDB loan just so you can use your CPF, then suffering high interest on a lifetime of repayments.
“But Ryan,” you say, “taking $20,000+ out of my bank account feels like a vasectomy without anaesthesia”.
But faithful reader, taking a 30 year loan at 2.6% would be like getting kicked in the crotch after.
If you are capable of paying the rest of your house after financing (80% maximum from banks), there’s no need to molest your CPF account. It’s growing at 2.5%, and that’s a solid rate that beats most investment products. And what are you going to do with all that money in your account anyway?
With our current inflation, those savings have the shelf life of sushi in a wet sock. Better use it for something, and soon. If you’re not investing the money, choose a bank loan and use it for the house.
4. When You’re Not in A Rush
One benefit of HDB loans is a lack of early payment penalties. So if you’ve had a sudden windfall, you can rush to pay off the balance. This spares you from years of accumulating interest.
It also caters to that minority who’ve received advice like “Pay off your home loan as soon as you can”. Which on the scale of bad advice, is up there with “When a policeman pulls you over, insult his mother and accelerate”. More details about paying off your home loan early here.
For the majority of us, the home loan process is like a coach bus to Genting. It’s long, the headlights don’t work, and we may not get there alive. Under those conditions, we’d rather not rush. And if you agree that fast repayment’s irrelevant, why should it matter that banks have pre-payment penalties?
5. When The Market Rates Are Good
When SIBOR or SOR rates are low, I’d say bank loans beat HDB loans in every aspect. Yes, even security, for the simple fact that smaller repayments mean more money in the bank.
This fluctuates every month, so you need to check. And while it used to involve four hours of phone calls and a migraine, that time is past; today you can look up free sites (like MoneySmart) to compare rates in minutes.
Do you think a bank loan would serve you better? Comment and tell us why!
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