Why is the ROI of a 60% loan higher than a 70% loan in getting a home

The Return on Investment (ROI) of a home purchase can be influenced by several factors, including the loan-to-value (LTV) ratio. Here are some reasons why the ROI of a 60% loan might be higher than a 70% loan:

Lower Debt Servicing

With a 60% loan, you are borrowing less money compared to a 70% loan. This means your monthly mortgage payments will be lower, reducing your overall debt servicing costs. Lower debt servicing can lead to higher cash flow, which can be reinvested or used for other expenses, potentially increasing your overall ROI.

Lower Interest Payments

Since you are borrowing less with a 60% loan, you will pay less in interest over the life of the loan. Lower interest payments mean more of your money goes towards the principal amount, rather than just covering interest, which can enhance your ROI.

Greater Equity

A 60% loan means you have to put down a larger down payment (40% of the purchase price), giving you more equity in the property from the outset. Higher equity can provide a better buffer against market fluctuations and may result in a higher ROI if the property appreciates in value.

Reduced Risk

Borrowing less money reduces your financial risk. With a lower LTV ratio, you are less exposed to market downturns and interest rate increases, which can protect your investment and potentially lead to a higher ROI over the long term.

Compliance with TDSR and MSR

In Singapore, the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) regulations limit the amount you can borrow based on your income. A 60% loan is more likely to comply with these regulations, ensuring that your mortgage payments are sustainable and reducing the risk of default, which can negatively impact your ROI.

These factors combined can make a 60% loan more attractive in terms of ROI compared to a 70% loan, as it allows for better financial management, lower costs, and reduced risk.