Does a 90% LTV mortgage loan impose higher risk than a 60% LTV mortgage loan?

30-11-2016

There is a myth that if you make a higher down payment and get a smaller mortgage loan, the risk of your property becoming negative equity will be lower.But how true is this? 

In a downward cycle, irrespective of the down payment you have made, the loss in equity is the same. Assuming the purchase price is 4 million and 20% has been lost for the current property, the loss is 0.8 million irrespective of the amount of down payment already made.

For example, Mr. Chan and Mr. Ho has 2 million in cash each and they both purchased an identical 4 million property. Mr. Chan used a 90% LTV mortgage for his 4 million property while Mr. Ho used a 60% LTV mortgage for his 4 million property.

The property is now de-valued by 20% in each case. Mr. Chan’s mortgage which is 3.6 million is now a negative equity mortgage as the property is only worth 3.2million.  Mr. Chan has only paid up 0.4 million as down payment and he still has 1.6 million in cash.

Mr. Ho has paid up 1.6 million as down payment and he has 0.4 million in cash. Although Mr. Ho’s mortgage still has positive equity (2.4 in mortgage loan while 3.2 in property value), Mr. Ho is in a worse-off position in terms of opportunities as he has less cash on hand.

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