Debunking 7 Myths Of Bank Home Loans

Background

Image result for once upon a timeIn early 2013, when I first received the keys to my BTO flat, I had a mortgage of about $255,000. Like most first-time BTO owners, by default, I was on the HDB Concessionary Loan (HDB CL).

Even in 2013, there was nothing “concessionary” about the mortgage rate of 2.6%. SIBOR rates were hovering at 0.5%-0.7% then and most banks were offering home loans at rates wayyyyy below 2%. With a loan period of 30 years and at the “concessionary” mortgage rate of 2.6%, I found myself paying about $1,020 a month. (Using this calculator here.)

A few months later, I decided to abandon the HDB CL. I switched to a bank loan that came with a 2.5% interest cap for the first 10 years.

A comparison of the two loans below:Saving more than $100 a month immediately, I decided to recommend this bank loan to many of my friends.

The response was lukewarm at best and many brushed the suggestion off. That was when I realised that many people have biases and misconceptions against banks and bank loans.

Like maybe this one below.

Here’s 7 more Myths about Bank Loans:

1. Bank Loans Are Only For Private Properties

As mentioned earlier, I stay in a 5-room HDB BTO and had refinanced to a bank loan 4 years ago.

2. I Cannot Use CPF To Pay For A Bank Loan

For the bulk of the past 4 years, we have been using our CPF OA funds to pay the monthly installments of our bank loan.

3. I Must Pay More Cash When I Take A Bank Loan

This is not exactly a myth. At the point of purchase of a flat, taking a bank loan means that the first 5% of the down payment has to be strictly in cash.

However, one need not pay more cash during refinancing. For example, I was initially on the HDB CL and when I refinanced to a bank loan, there was no need for any cash top up.

4. I Have To Pay A Lot Of Fees For A Bank Loan

When you switch from a HDB CL to a bank loan, there are legal and valuation fees involved. They can easily cost $2,000. However, some banks do absorb these fees, especially during a promotion.

I personally benefited from one such promotion and I did not incur any switching fees 4 years ago.

5. I Cannot Prepay A Bank Loan

Some loans do have a commitment period and prepaying a bank loan during that period could incur a penalty.

However, there are some bank loans that do allow prepayment without any condition attached.

6. I Cannot Take A HDB Loan Again Once I Have Taken A Bank Loan

This only applies to the house I am staying in right now. Once I switch to a bank loan, I cannot go back to the HDB CL for the same flat.

But if I were to sell my flat and purchase another one, I can decide between a HDB CL or a bank loan again.

7. On A Bank Loan, I Cannot Approach My MP For Help If I Have Difficulty With My Mortgage Payments

I heard from friends who work in banks that they do get approached by MPs to help some buyers tide through a difficult period. It is also in the bank’s interest to help these buyers come up with an alternative arrangement.


This article is sponsored by DBS Bank. I only believe in promoting products and services that I would use myself, and when I believe they are of value to my readers too. The views in this article are strictly mine.

 

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2 thoughts on “Debunking 7 Myths Of Bank Home Loans

  1. Early Retirement SG

    You can prepay the POSB/DBS loan without any penalties. (This is the loan with the 2.5% cap.)

    Also, I think people just have inertia to either refinance or to “reconsider” taking a bank loan.
    Cos it’s so “easy” just taking the default HDB loan.
    Although after putting in some effort to set up the operations, servicing a bank loan is the same as servicing a HDB loan. But the effort to set it up is a bother. Saves $100/mth thou, but some ppl aren’t willing to go through the hassle.

    Have a good day bro.
    ERSG

    1. My 15 HWW Post author

      Hi ERSG,

      Spot on! You can only bring the horse to the well and can’t force him to drink.

      You have a good week too!