Leverage

Rates and thresholds change. The current figures are kept in one place: the Singapore property rules reference.

What it is

With a typical Loan to Value limit of 75 percent on a first housing loan, a buyer puts down at least 25 percent of the price in cash and CPF and borrows the rest, see the LTV entry. Because most of the purchase price is borrowed, a change in the property's value is a much bigger percentage move on the buyer's own capital than the same change would be on the full price. That amplification is what leverage means, and it works in both directions, not just the direction buyers hope for.

How leverage cuts both ways

Take a $1,000,000 property bought with $250,000 of own capital, 25 percent, and a $750,000 loan. If the value rose to $1,100,000, a 10 percent increase, purely as an illustrative example and not a forecast, the gain on the buyer's own $250,000 works out to $100,000, a 40 percent gain on the capital actually put in, before any costs. Run the same move in the other direction and it is just as real: if the value fell to $900,000, a 10 percent decrease, the loss is also $100,000, a 40 percent loss on the $250,000 put in. Fall far enough and the outstanding loan can exceed what the property is worth, leaving the owner owing more than the home is worth even after selling everything, this is a genuine risk of leverage, not a scare tactic, and it is the core reason leverage needs to be understood honestly before it is used.

What beginners get wrong

A common mistake is thinking about leverage only as "the bank's money working for me," and never running the numbers in reverse. Another is ignoring why TDSR, capped at 55 percent, and MSR exist in the first place, they are designed to stop a borrower taking on more leverage than their income can service if conditions get tight, not to make borrowing harder for its own sake. A third mistake is assuming today's interest rate will hold for the life of the loan, when a rate rise increases the monthly cost of servicing the exact same loan amount.

What to check

Check TDSR headroom at a stressed interest rate, not just today's rate, check how much genuine buffer exists if income dropped or the unit sat vacant for a stretch, and check what would happen to CPF and cash position if a sale were forced in a down market. This entry is general education on how leverage works, not a recommendation on how much leverage any particular person should take, that depends entirely on individual risk tolerance and finances, and is a decision worth discussing with a qualified adviser.

Winfred Quek is an Associate Marketing Consultant at Crestbrick Pte Ltd (CEA Licence No. L31010886H). CEA R073319H. This page is general property and investing education only and does not constitute financial, investment, or legal advice. Verify current figures with IRAS, HDB, CPF Board, or MAS before making any decision.