Interest rates

CNA Explains: Will the HDB Mortgage Rate Rise as Interest Rates Rise?

In the CPF Board’s latest review, published on May 27, the three-month average of interest rates for major local banks, from February to April 2022, was 0.09%.

With the current rise in interest rates, could the HDB mortgage rate also increase?

Singcapital chief executive Alfred Chia said interest rates have been abnormally low since the 2008 global financial crisis, and historically the US Federal Reserve’s average is around 4%. After the recent rate hikes, it is now between 2.25% and 2.5%.

Mr. Chia expects the Fed to raise interest rates to around 3.5% by the end of the year, but he does not believe that bank savings rates will rise enough to affect the CPF OA rate.

He pointed out that in 2007, before the financial crisis, interest rates in the United States increased by an average of about 5%, but CPF OA rates remained at 2.5%.

“There is a mechanism in place, and it (results in) a very stable rate for HDB owners. It won’t always be like this, but it’s been like this for over 20 years,” he said.

With inflation rising, Parliament this month debated whether CPF interest rates should rise to keep pace, and Labor Minister Tan See Leng’s response was that despite the low interest rate environment, the government continued to pay generous interest rates due to the floor tariffs.

Mr Chow of 99.co said: “Currently there may be pressure to increase the CPF ordinary, special and Medisave rate to keep up with inflation. However, the flip side would be that more homeowners would have to pay more for their HDB concessional loans since their loan rates are pegged to the regular account.

“It will be something the government will take into consideration before deciding on any decision.”

What else should homebuyers look out for when choosing HDB or bank loans?

But there are other considerations besides the interest rate to take into account when taking out a home loan. Many first-time home buyers should consider an HDB home loan, if they qualify, for other reasons, experts said.

Mr Chow said one is the smaller down payment compared to a bank loan. HDB allows buyers to borrow up to 85% of the property value compared to 75% for bank loans.

There is also the option to pay the HDB deposit with CPF and without cash. Bank loans, on the other hand, have a minimum requirement of 5 percent to be paid in cash.

If one takes out an HDB loan, it is possible to upgrade to a bank loan, but homeowners cannot refinance their bank loans into HDB loans.

“The long-term interest rate is much more stable,” Chia said, adding that those who took home loans from banks are now worried about rising mortgage rates.

However, landlords who buy older HDB units on a shorter lease may not be able to fully utilize their CPF to pay off the home loan, Chow said. He advised buyers to check the HDB portal for the exact amount when buying older homes.