"Good debt" could exist, but in practice, it's a different story

While reviewing my finances earlier this year, a financial adviser suggested a policy that might yield attractive returns. The premiums were higher than I could afford. The workaround was simple on paper. Borrow at a lower interest rate than the policy’s projected return and keep the spread. The numbers looked tidy. The idea did not. I grew up with a healthy skepticism of debt and the headlines about people who fall behind on repayments. Still, the pitch raised a fair question. Was I being overly cautious, or could leverage be used responsibly?

The short answer is that borrowing to invest increases both the size and the speed of any outcome. If the investment underperforms, the loan remains. That is why, for most working households, this strategy should be treated as speculative. It belongs only in the category of money you can afford to lose without disrupting your essential bills, your emergency fund, or your retirement path.

So what counts as healthy debt, and what does not? Practitioners usually frame this in terms of purpose, affordability, and stability of cash flow. Loans that fund productive or foundational needs, such as education or housing, can be considered healthier because they support long-term earning capacity or provide shelter. Loans taken for lifestyle upgrades or nonessential consumption are usually unhealthy because the item loses value while interest compounds. Even among healthy uses, the key is proportion. A household with multiple income streams and a cash buffer experiences the same loan very differently from a single-income family with irregular pay.

Affordability starts with cash flow. A common rule of thumb is to keep total monthly debt repayments at a conservative share of gross income so that day-to-day expenses and saving goals remain intact. Some people aim for 35 percent or less as a personal ceiling, though lenders also evaluate borrowers against regulatory measures for property and other secured loans. Think of the lender’s threshold as a maximum. Your own threshold should be lower and aligned to your real budget, your job stability, and your savings rate.

Before taking any loan, understand every cost that will not appear in the headline rate. Processing fees, annual charges, and mandatory insurance can add percentage points to the real cost. Early repayment penalties can limit your ability to pay down the loan faster if your income rises, while late fees punish small mistakes and can snowball. Tenure matters. A shorter loan typically reduces total interest paid but raises the monthly obligation. A longer loan lowers the monthly figure but increases lifetime interest and extends the period of risk. Pick the shortest tenure that still allows you to save and invest toward your non-negotiable goals.

Now to the heart of the pitch: borrowing to invest. In theory, if the investment’s expected return exceeds the loan’s interest after fees and taxes, the spread is yours. In practice, expected returns are not guaranteed and returns rarely arrive in a steady monthly stream that matches your repayment schedule. Equity markets are volatile. Alternatives and speculative assets can move sharply against you. Even insurance or structured products with projected yields depend on assumptions that may not hold. If the investment drops in value or pays out later than planned, the monthly repayment remains due. When cash is tight, the investor becomes a forced seller, locking in losses at the worst moment.

This is why borrowing to invest in Singapore should be constrained to two conditions. First, you have a sizable emergency fund that is separate from both the loan proceeds and the investment. Second, you can extinguish the loan at any time from other liquid assets if the strategy goes against you. This is not about appetite for risk. It is about capacity to absorb a bad sequence of returns without jeopardizing housing, healthcare, or dependents.

Market conditions also matter. In periods of economic uncertainty or when interest rates are rising, the cost side of the equation can move against you quickly. Floating-rate loans reprice, while investment returns may soften. If the cost of funding rises above what you earn on the investment, the spread becomes negative and the strategy turns into a drag. The stress is not only mathematical. The cognitive load of juggling an investment that needs time to recover with a loan that demands punctuality is significant. People under stress tend to make defensive decisions that crystallize losses.

Housing loans deserve separate treatment because they are large, long term, and backed by a tangible asset. For many households, a property loan is unavoidable. The question is whether to accelerate repayment or to keep the installment schedule and invest surplus cash instead. There is no one-size answer, but there are practical tests. If your mortgage rate is low and your asset allocation is underweight long-term investments, continuing the scheduled repayments while investing surplus funds can build flexibility and potentially improve long-term outcomes. Liquidity has option value. Cash and liquid investments can be deployed for emergencies or opportunities. By contrast, advance payments sunk into a property reduce monthly interest but cannot be quickly retrieved without refinancing or a sale. If job security is uncertain, maintaining liquidity is often the safer choice.

There are exceptions. Some people prioritize the peace of mind that comes with being debt free. Others may face higher mortgage rates or have limited investment knowledge and prefer the guaranteed interest savings from early repayment. Before making lump sum prepayments, check for lock-in periods, partial prepayment rules, and administrative charges. If you plan to refinance later, consider whether prepaying now affects your future options. The right call depends on your time horizon, your tolerance for variability in investment returns, and the structure of your household cash flow.

What about the suggestion to refinance or restructure to match investment returns? Be careful with narratives that rely on stable spreads. Investment-linked policies, dividend projections, or back-tested strategies can look compelling, but they are not contractual. A sensible way to frame this is to run a stress test. Assume your investment returns come in lower than expected, or arrive later, and your loan rate resets higher at the next review. If the strategy still works under those stressed conditions without dipping into essential savings or extending your tenure uncomfortably, it may be within your risk capacity. If the strategy only works when everything goes right, it is not a plan. It is a bet.

For unsecured debt that has already grown too large, the priority shifts from optimization to stabilization. If balances across credit cards and personal loans have reached a level close to a year’s worth of monthly income, repayment becomes complex and costly. At that point, a formal consolidation into a single account with a structured plan can reduce interest and simplify repayment. Consolidation is not a rescue if you immediately add new unsecured debt on top. It is a disciplined path back to control that works only when spending is cut, income is stabilized, and the new plan is followed closely.

Education loans sit somewhere between productive and risky. They can be healthy if the course credibly boosts earning power and if repayments fit your projected income. They become unhealthy if the accreditation is weak, the income uplift is speculative, or the loan is sized to living expenses and lifestyle rather than tuition. Again, purpose and proportion decide the category.

All of this sits within the broader context of Singapore’s policy landscape. Borrowers should be aware that lenders apply internal limits and regulatory measures designed to curb overextension, particularly on property loans. These rules protect the financial system and, indirectly, households from shocks. They do not, however, replace personal planning. A bank may be willing to extend you the maximum. That does not make it the right number for your life.

If you are weighing borrowing to invest in Singapore, take a pause and ask three plain questions. What happens to my plan if the investment return is late or lower for two years in a row. Can my household absorb a rise in borrowing costs without cutting essentials or cancelling protection policies. Do I have enough liquid assets to unwind the loan without selling assets at a loss if the strategy fails. If any of these answers are uncomfortable, the strategy is not aligned with your reality.

Practical sequencing helps. Build a genuine emergency fund first. Protect your household with appropriate insurance based on dependents and income stability. Contribute steadily to long-term investments that match your time horizon. Then, and only then, consider any leveraged strategy as a small, contained satellite to a solid core plan. If you are already carrying debt, prioritize clearing high-cost balances before chasing return projections. The reduction in interest and stress is a real gain.

There is also the human side. Money decisions do not happen in a vacuum. If a strategy keeps you awake at night, it is not low risk for you, regardless of what a spreadsheet suggests. Peace of mind is a valid factor. The right plan is the one you can execute consistently through market cycles, job changes, and family events. Consistency requires room to breathe.

In the end, the promise of spread income from borrowing to invest is seductive because it compresses time. It offers the feeling of getting ahead faster. Sometimes it works. Often it amplifies fragility that was already present. The policies and products in Singapore provide guardrails and options, not shortcuts. Use them to strengthen your foundation rather than to stretch beyond it.

If this reflection comes after the fact and your unsecured balances have already become overwhelming, speak to your lender early, review consolidation options, and rebuild a cash-based budget that stops the bleed. Free financial education resources are available and can help you frame decisions before they become urgent. If you are at the beginning of your housing journey, remember that you do not need to rush into early repayment if it leaves you illiquid. Liquidity is protection. A steady plan that survives bad months is better than a clever idea that fails the first time conditions change.

Borrowing to invest in Singapore can be done, but it should be the last tool you reach for, not the first. Start with your timeline. Then match the vehicle. The smartest plans are quiet, repeatable, and built to withstand surprise.