Angeline C (iCompareLoan.com)
Given the recent news of losses sustained by home sellers in Sentosa Cove of as high as 50%, it would not be surprising if borrowers with loans on property in the area are now subject to tighter checks by banks on their credit and loan profile.
This is one scenario where a sharp fall in property value could trigger a margin call.
Do you know that you can also suffer at the hands of a property margin call?
What is a Property margin call?
A margin call is where the bank demands a top up of your loan when the fall in property value results in your loan exceeding your loan to value ratio (LTV) or property value.
In 2014, Mr Tan took a loan of S$800,000 to purchase a condo unit at S$1 million. The loan constitutes a LTV of 80%.
Due to the property downturn, the property is now valued at only S$600,000, while the outstanding loan stands at S$600,000.
To rebalance the LTV to 80%, the bank could issue a margin call for Mr Tan to pay the difference of
S$600,000 – 80% of S$600,000 = S$120,000
In another scenario where the property is only worth S$500,000, the bank may issue a margin call of the difference in loan outstanding and property value of S$100,000.
What triggers a margin call?
A steep decline in the value of your property. This could be due to a recession, weak property market, natural disasters, etc.
What should you do?
Read the conditions in your mortgage letter of offer
The letter of offer, or contract from the bank offering you a loan, lists the terms and conditions of the loan. Not that you have any choice as every bank has such clauses.
Do read the whole document and ask if you have any query.
Understand the conditions that could trigger a margin call.
Back up plan
If you are buying a property on borrowed money, do ensure you have funds that you can access in the event of a margin call.
Properties most at risk are those in the high-end luxury segment where prices were inflated during the up-cycle.
Maintaining good credit record
Demonstrating a good credit record like paying your bills on time and having a stable job that shows you can service the loan helps when negotiating with the bank in the event they issue a margin call.
Maintaining a conservative total debt servicing ratio.
Calculate your loan-to-value
Based on last transacted prices of property in the vicinity, calculate your LTV to see if you are at risk.
If your LTV has exceeded the limit, that is not to say that the bank will issue a margin call.
Issuing a margin call is generally not the first call of action of the bank as it means foregoing interest income and potentially impacting the good relationship with the customer and possibly affecting property market sentiment, which can lead to a vicious cycle.
Locked into Expensive Home Loan Rates and Cannot refinance
If you bought a property for S$1m and take a loan for 80%, several years down the road, your property could be worth S$900,000 and your loan could be S$750,000. Your loan-to-value will become 83.3%. This means that banks will require you to pay down 3.3% to refinance. If you are unable to pay down your loan, you will be stuck with your current financier who may be charging you a higher mortgage interest rate and yet you cannot refinance your home loan as you cannot afford to pay down your loan to 80% of the property value.
Hopefully you do not reach this stage where you cannot refinance. So it is best for you to refinance to pay down your principle faster so that your outstanding loan drops faster.
You could explore be a win-win solution to both parties to lower your interest payments and improve your ability to service the loan. Read more here.
If you have queries on how to protect yourself from a margin call, you can speak to a mortgage broker who can help you in this process.
Read more about home loan terminology.