If you’re unlucky, you may be one of the few property owners faced with a margin call. This is when a bank asks for a cash top-up, as part of the requirements for your home loan. This often catches property owners off-guard, as it typically occurs years after the home loan was approved. In this article, we’ll examine what on-margin calls are, and when they’re likely to happen:
What is an On-Margin Call?
An on-margin call happens when the market value of your property falls significantly, thus affecting the LTV (loan-to-valuation) ratio of your home loan. When this occurs, the bank might require you to top-up your loan.
Depending on which bank you use, there are various ways this may happen. Here are the two common examples:
Example 1: Top Up the Difference Between the the Outstanding Home Loan and the Valuation
Say I have a house worth $2 million. I took a housing loan to buy it, and after a few years servicing the loan, I still owe $1.7 million.
Then comes a property down-cycle, and the value of my house plummets. The bank conducts a valuation, and it determines that my house is worth only $1.6 million. This is actually less than my outstanding home loan ($1.7 million).
The bank can then issue an on-margin call, and I would have to top up the difference of $100,000. I could do this using either cash, or my CPF.
Example 2: Balance the Loan-to-Value Ratio
Say I buy a house worth $2 million. I have a LTV of 80%, so my loan amount is $1. 6 million. After a few years servicing the loan, I still owe $1.3 million.
Then comes a property down cycle, and the market value of my house falls to $1.6 million. The LTV of my house has changed: 80% of $1.6 million is just $1.28 million. And yet I owe $1.3 million.
I might have to pay the difference of $20,000, to bring my LTV back to 80% of the market value (again, cash or CPF).
Different Banks, Different Rules
Various banks interpret the rules for on-margin calls differently. The wording on the document is often vague, so it’s best to ask the relevant banker directly. See below for more on this.
When Can You Expect On-Margin Calls?
With thousands of property loans to deal with, most banks will not spend the time, money and administrative manpower needed for constant valuations.
For the most part, banks only start checking under certain conditions. These are:
- During a sustained property down-cycle
- Changes or disruptions by a property developer (if you buy an under-development property)
- Sudden property market crashes
If you keep a close watch on the property market, you may have noticed a recent worry about on-margin calls. This is mostly due to the strong cooling measures this January. It’s suspected that property values may fall, and banks may conduct valuations.
However, on-margin calls are unlikely for most property buyers in Singapore. This is because we rarely see sudden drops (20% or more) in property market values.
There are also a number of ways to avoid on-margin calls:
1. Scrutinize the Housing Loan Conditions
When signing for a home loan, pay particular attention to the the foreclosure clauses. The loan document will state whether and how the bank makes on-margin calls.
If you cannot find it in the document, ask the relevant banker directly. Ensure that the banker’s response is written (e.g. in an e-mail) and not merely verbal.
You can also talk to mortgage specialists at sites like SmartLoans.sg, who are familiar with the various banks and their methods.
2. Get a Lower LTV if Possible
The maximum LTV (loan to Valuation ratio) is usually 80%. But must you really borrow that much, just because you can?
The lower your LTV (and hence the lower your loan quantum), the less likely it is you’ll face a margin call. If you get a LTV of 60%, for example, property values might have to plummet as much as 40% before you get a margin call. This is not likely in land-scarce Singapore.
3. Get a Good Property
This should go without saying, but we’ll mention it anyway: Get a good property, and you will not face on-margin calls.
It is unusual for a property to depreciate so much that a margin call is required. This tends to happen only to dubious and risky property investments (e.g. units with expiring leases). Follow us on Facebook, so we can warn you when we spot them.
4. Have an Emergency Fund
It is recommended that you build an emergency fund, preferably about six months worth of your income. This is not just for property, but also for issues such as medical complications.
If you have a healthy savings habit, you should not have problems in the event of an on-margin call.
How Strict are the Banks?
Most banks will ask that you pay the on-margin call within one or two months. However, banks are known to be lenient with on-margin calls (local banks in particular).
It makes very little sense for a bank to foreclose due to on-margin calls, and lose out on the interest they were making from you. As long as you continue to make home loan repayments on time, most banks are open to negotiations or discussions.
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