📈 Leverage and Risk: How Mortgages Can Make You Quick Money or Lose a Lot of Money?

The editor will help you decipher the most mysterious and dangerous magic in the real estate market: the leverage effect!

Nine out of ten Hong Kong homebuyers rely on bank mortgages. Some say, "The more you borrow, the faster you earn!" But others fall into the trap: "If you can't keep up the payments, you'll lose everything!" The key to this is the so-called leverage effect .

Leverage can magnify returns, but it also magnifies risks. This article will analyze how mortgages can make you quick bucks , but also how they can lead to massive losses .

1️⃣ What is leverage? 🔍

Basic Concepts

• Leverage effect = using borrowing to amplify the scale of investment.
• For example, if you have 1 million, if you don’t borrow money, you can only buy assets worth 1 million.
• But if you use this 1 million as a down payment and borrow another 4 million for a mortgage, you can buy a house worth 5 million.

👉 My understanding is that leverage is like a magnifying glass, which can amplify the returns on your assets, but also amplify the risks.

Common leverage in the Hong Kong property market

• First-time buyers: can borrow up to 90% mortgage.
• That is, you only need a 10% down payment to buy a building.

2️⃣ How leverage can help you make quick money💰

Example 1: Property price appreciation

• Property price: 5 million
• Down payment: 500,000 yuan (90% mortgage)
• One year later, the price of the property increases by 10% → to NT$5.5 million
• Earned 500,000 (excluding other expenses)

👉 Return rate: 500,000 ÷ 500,000 = 100% !

Although the property price only increased by 10%, because you only put down a down payment of 500,000, the leverage effect doubled your return on investment.

Example 2: Using rent to offset mortgage payments

• Monthly rent: 15,000 yuan
• Monthly payment: 16,000 yuan
• In fact, you only need to pay 1,000 yuan per month.
• If property prices rise again, you can still earn capital appreciation.

👉 Editor’s Note: Many successful investors leverage the power of rent collection + property appreciation, waiting for tenants to help with the payments while enjoying rising property prices.

3️⃣ How leverage can cause you to lose money ⚠️

Example 1: Falling property prices

• Property price: 5 million
• First installment: 500,000
• A 10% drop in price after one year → the property price is now $4.5 million
• The assets evaporated immediately by 500,000, and the first phase was completely wiped out.

👉 Editor’s note: A 10% drop may not sound like much, but for highly leveraged buyers, it’s equivalent to losing their down payment.

Example 2: Pressure to raise interest rates

• When borrowing a 90% mortgage, the repayment and interest rates are very sensitive.
• For example, if the interest rate rises from 2% to 4%, the monthly payment could increase by several thousand yuan at any time.
• If wages don't increase, cash flow will explode immediately.

Example 3: Unemployment due to mortgage payments

• Falling property prices + no tenants + no income → a triple blow.
• Worst case scenario: the bank takes possession of the property and it becomes a negative asset.

👉 Editor's honest opinion: Leverage is a double-edged sword. It is a magic wand in a rising market, but a butcher's knife in a falling market.

4️⃣ Characteristics of leverage in the Hong Kong property market🏙️

Why do Hong Kong people particularly like to use leverage?

• The house prices are too high, I have no choice but to borrow.
• Hong Kong's bank mortgage system is mature and interest rates are relatively low.
• The long-term rise in the property market has given people the illusion that "the more you borrow, the faster you earn."

Where are the risks concentrated?

• Interest rate hike cycle: interest costs increase significantly.
• Property price adjustment: Highly leveraged buyers are most likely to end up in negative equity.
• Economic fluctuations: rising unemployment and heavy mortgage pressure.

👉 My take: Hong Kong people are obsessed with real estate and often rely too much on leverage, which leads to problems when they encounter adversity.

5️⃣ Tips on using leverage📋

Tip 1: Do what you can

• Don't borrow blindly to the limit, leave some buffer.
• Even if the bank approves 90%, you don't necessarily have to borrow the full amount.

Tip 2: Self-stress testing

• If the interest rate increases by 2-3%, can you still afford it?
• Suppose the property price drops by 20%, can you still handle it?

Tip 3: Long-term holding

• Leverage can cause large short-term fluctuations, but long-term holding can smooth out risks.
• Although the long-term trend of the Hong Kong property market is upward, the fluctuations in the middle may be very severe.

Tip 4: Diversify your investments

• Don't put all your money into the property market.
• It can be combined with stocks and funds to reduce the risk of a single market.

👉 Editor's advice: Leverage isn't for everyone, especially those with limited courage or unstable income. It's best to be conservative.

6️⃣ Real Cases 👤

Ah Wei, 30, used a down payment of HK$1 million and borrowed a 90% mortgage to buy a HK$10 million flat. Initially, property prices appreciated by 10%, and he made a HK$1 million profit on paper, feeling incredibly happy. However, two years later, interest rates increased, pushing monthly payments from HK$30,000 to HK$40,000. Property prices also plummeted by 15%, leaving Ah Wei with a negative balance. Ultimately, Ah Wei faced a loss, not only on the down payment, but also on the down payment.

👉 This story reminds us: leverage can make you rich, but it can also be fatal .

7️⃣ Editor’s Summary✨

Leverage is like a double-edged sword:

• The rising property market → can magnify returns and make quick money.
• Falling property market → can magnify losses and make you cry out in frustration.
• Hong Kong people like to use leverage because housing prices are too high, but they must be aware of the risks.
• Don't borrow all the money; leave a buffer to ensure you can afford it.

🙋♀️ Editor's message:
Buying a property isn't a gamble; it's a long-term race. Leverage can help you accelerate, but if used improperly, it could lead to premature failure. Remember, it's not leverage that harms you, but how you use it .