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

The ROI (Return on Investment) of a 70% loan being higher than a 60% loan in the context of buying a home in Singapore is not typically the case, but here are some scenarios where it might seem so:

Leverage Effect

With a 70% loan, you are leveraging more of the bank's money to purchase the property. If the property market is rising, the potential capital appreciation could be greater because you have invested less of your own money. However, this comes with higher risk, as you are more exposed to market fluctuations and interest rate changes.

Lower Initial Outlay

A 70% loan requires a lower down payment (30% of the purchase price) compared to a 60% loan (40% down payment). This lower initial outlay can mean you have more cash available for other investments or expenses, potentially increasing your overall ROI if managed well.

Cash Flow Management

If the rental income or other returns from the property are sufficient to cover the higher mortgage payments associated with a 70% loan, then the ROI could appear higher. However, this is highly dependent on the property's rental yield and the overall market conditions.

It's crucial to note that while a 70% loan might offer higher potential returns due to leverage, it also increases your financial risk. In Singapore, regulatory measures such as the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) are in place to ensure borrowers do not over-leverage themselves, which can mitigate some of these risks but also limit the potential benefits of higher leverage.