As the economic crisis worsens, here’s a note of caution to those who have taken a non-HDB property loan, or intend to take up one:
Your friendly bank may invoke a margin call on your property loan. If your property is worth less than what you still owe the bank, you may be asked to “top up” the difference.
Suppose you bought a condo last year for $1 million and took a $800k mortgage loan. After servicing your loan for about a year, you still owe the bank $780k. Given the current market conditions, if the bank values your condo at a lower value of $700k, it could invoke the security margin clause it is entitled to, and take action against you e.g. ask you to top up or even to redeem the entire loan.
The following is extracted from the mortgage terms of a local bank:
“We may from time to time conduct valuation or revaluation at your cost and expense… If the market value of the Property falls below what we, in our sole opinion, consider to be an adequate security margin we shall be entitled, without prejudice to any other right which we have, to reduce the Facility, withhold the release or further release of the Facility, and/or to require repayment of such amount of the Facility as we may specify and/or require additional security acceptable to us to be provided to us.”
It would be worse if you had taken a 90% loan. That is, you borrowed $900k in the above example.
Read about how some expats are affected by margin calls on their home loans.
If such margin calls become increasingly widespread, we may see property prices accelerate downhill. This will be a very painful experience for some, but at the same time, it may also be an opportunity for others.
12 Comments
rule 101 there is no free lunch.
like our MM Lee says, when other is paying you a much higher rate. read between the lines and do think why?
so lower loan rates from your friendly banker?
hopefully singaporeans become wiser and more financial savvy after this financial crisis. no more walking in with eyes open but blinded by greed.
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Very informative for young peeps like me who have yet to go into workforce.
Don’t you think that property in Singapore is way too expensive?
for the sake of responsible journalism, the case is mainly referring to australia property loan in singapore dollars. Due to the recent 30% depreciation of AUD, the big aussie banks are now asking for 30% margin calls now.
does that preclude the possibility of margin calls here should local ppty face a sharp decline as seen during the AFC? fact is that margin calls existed and still exist. i believe it’s only a matter of time before we see over-leveraged locals get the “de facto” margin calls on their de facto local residential ppty.
Assuming AUD430k property with 70% loan AUD300k. You took the loan in SGD hence liability is SGD390k, assuming exchange at that point in time is 1.3 (AUD300k/1.3 = SGD390k)
Now exchange rate drops 1.0 i.e. AUD weakens against SGD, your SGD liability now becomes AUD390k (SGD390k / 1 = AUD390k).
Your LTV ratio has become 91% instead of previously 70% (AUD390k / AUD430k). That triggers the margin call from the bank, to bring the LTV ratio to lower levels
Page 27 in today’s Sunday Times also gave 2 examples of such housing loan problems.
Given all these issues, plus others, I think property prices will further depress.
I personally dont think there is margin call clause on pure SGD property loans. Unless the SGD loan is used for financing non-SGD assts, which effectively means there is a cross-currency swap contract tied up together with the loan. Similar to any other financial instruments which are marked-to-market daily, there is a margin call if mark-to-market values falls below treshold.
This risk is not apparent to many such pple as they think they can pay lower SGD interest rates (rather than higher AUD interest rate) on Aussies properties.
If there is no margin call, I would gladly take a JPY loan to buy Singapore properties, where JPY interest rates is rock-bottom low.
Top ups becoming a reality. Spotted at a local condo forum:
“I have a few properties in Central area , the loans are taking up with different banks .. Today one of the banks called me saying that valuation of one of my properties dropped and I need to top up $500k . Initially I took the loan of 70% . and the place rented out now .. So I have been paying my istallments quite steadily and been a good premier customer with the bank over 7 years never defaulting. I said them no way I am going to pay that 500k as I was paying and servicing the loan always in time. They said in that case they will have to take the measures .. ?? I have the money to top up if I wanted to but I would rather reserve my funds to buy some other property near the bottom in September. The question : What “Measures” they can implement ? And what should I do ? In the contract it says that the bank agrees to loan 70% of property value at any time.. which is now obviously dropped by around 25% .. so what if I do not top up ? what happens next ?”
http://forums.condosingapore.com/showthread.php?t=7111
thks for the timely wakeup call for those who are still in dreamland..its going to be real bad..
In today’s Strait Times:
“Some owners are already having to shell out cash to make up the shortfall between their purchase prices and the valuation now. Take a home that you agreed to buy for $1 million, with a 20 per cent deposit and the assumption of obtaining a loan for $800,000.”
“If the valuation falls to $900,000, the 80 per cent portion is now $720,000. So you need to chip in $80,000, in addition to your $200,000 deposit, to make up the $1 million purchase price.”