Since the 1st of January 2003, with the opening up of the public housing loan market to the private sector, HDB flat buyers/owners have been able to obtain housing loans with commercial banks. The resulting price war amongst the various banks and financial institutions has seen seemingly endless rounds of undercutting of home loan rates and ceaseless offers of "hard to resist" loan packages. The HDB home loan market, estimated to be worth S$63 Billion, is one that the banks and finance companies can ill-afford to ignore. Borrowers are reaping the benefits of the fierce competition.

With the myriad offerings of home loan packages, it is no wonder that HDB home loan borrowers can easily get confused. What then should a borrower look out for when taking up a bank loan? What are the legal implications that one should be aware of?

There are several considerations that the prudent borrower should take into account when deciding on which bank or finance company they wish to take a loan from:

1. Interest Rates

This is a foremost consideration. Most banks dangle carrots of "promotional rates" for the first few years. Currently, the first two years' interest rates charged by lenders are below HDB's concessionary rate of 2.6%. However, borrowers should note that interest rates for third and subsequent years are subject to change, based on market conditions such as competition from other lenders and the interest rate environment at that time. Lenders generally expect the current low interest rate environment to improve eventually. Borrowers should shop around for the best rates, do their sums accordingly and may wish to consult the banks on the instalments that they are likely to pay from the third year onwards based on what they think the interest rates may be by that time.

2. Early Redemption Penalty

For a bank to commit to a housing loan, it means setting aside a large sum of money for a long period of time in return for a very competitive rate of interest. Much paperwork is also involved. As such, most lenders will impose a penalty on borrowers who fully repay their loans and redeem their mortgages within the first few years. Typically, the penalty is set at 1% of the original or outstanding housing loan amount if the loan is redeemed within the first two years. Some banks also require borrowers to refund the legal subsidy given. If a borrower expects to be selling his flat within the typical penalty period, then he should consider a package which does not carry a penalty for early redemption.

3. Fire Insurance

It is often a term of the housing loan to insure your property against the risk of fire. Most banks pay the premium for an insurance policy covering this risk in the first year.

4. Legal Subsidy

With the entry of private banks and finance companies into the HDB home loan market, private lawyers have to be engaged to handle the mortgage documentation. Presently, most lenders offer a legal subsidy of 0.4% of the housing loan amount and lawyers charge approximately 1% of the loan amount. For an average HDB home loan of about $150,000, this subsidy works out to $600. The balance legal fee plus disbursements and stamp duties will have to be borne by the borrower. A borrower can use his CPF funds to pay his legal fees, disbursements and stamp duties.

Legal Issues

Once a borrower takes up a loan with a bank, a mortgage on his property is created. This means that the bank has a right as mortgagee over the flat. In the event that the borrower defaults on his monthly instalment payments, the bank has the right to seize and sell off the flat to recover monies owed. However, most banks are reluctant to such drastic measures unless the borrower is very difficult or unco-operative.

One thing borrowers should note, though. Banks may decide conduct a re-valuation of a flat it is financing and if the valuation of the flat has fallen, the bank may require the borrower to repay part of the outstanding amount in order to bring the amount of loan in line with the permissible quantum relative with the value of the flat.

What are the steps required to obtain a bank loan for a HDB flat?

Now we go on to describe the typical steps for purchase and refinancing scenarios.

In a purchase situation, once a borrower decides on and confirms a flat he fancies, he should then approach a bank or finance company for a loan. At the same time, he can decide on the lawyer that he wishes to appoint for his transaction. If he has a housing agent, the agent should be able to recommend one to him. The agent or banker would then liaise with the lawyer and provide them with the relevant information to start the ball rolling.

Prior to the first appointment date, the purchaser must visit his lawyer's office to sign a Warrant To Act and obtain a letter from the lawyer to the HDB confirming that the lawyer is acting for the purchaser and the bank. At the first appointment, the purchaser must submit his lawyer's letter to the HDB resale officer. Some lawyers are able to arrange to meet the purchaser at HDB only on the day of the first appointment, thus saving the purchaser the trouble of making a trip to the lawyer's office.

After the first appointment, HDB will take approximately two weeks to notify its approval of the transaction. During the second appointment, the lawyer will attend at HDB on the purchaser's behalf and collect the keys from the seller. The purchaser can either collect the keys personally from the lawyer's office or authorise his housing agent to collect the keys from the lawyer's office on his behalf. The estimated time needed to complete the purchase matter is about six to eight weeks from the date of the first HDB appointment.

For refinancing, the process is simplified. After the borrower selects the bank with which to refinance his existing loan, the bank will liaise with the appointed lawyer. The lawyer will then get the borrower to sign relevant documents and arrange for completion, which is typically six weeks from the date of the bank's letter of instruction to the lawyer.

For both the above scenarios, borrowers should note that they have the discretion to appoint the lawyers of their choice.