When Would Banks Exercise Margin Calls On Your Home Loan?



When Would Banks Exercise Margin Calls On Your Home Loan?

What is a margin call?

Margin calls are rare in Singapore, but they do happen. It occurs when the market value of your property drops drastically, causing your outstanding loan amount to be higher than the property’s value or the Loan-to-Value (LTV) ratio will be exceeded.

Example 1: Outstanding loan > property value

For instance, in 2018, the value of your property is $1 million. You took on a loan of $850,000. After paying off your loans for 2 years, the outstanding loan amounts to $800,000. However, due to a global crisis, property prices have been affected. The vale of your property is now $700,000. Seeing that the outstanding loan amount is more than the value of your property by $100,000, the bank can make a request for you to top up the differences through cash or CPF.

Example 2: Loan-to-Value (LTV) ratio is exceeded

LTV ratio is used to determine how much you can borrow as a percentage of the property’s value. In Singapore, most local banks offer up to 75% LTV (subjected to individual banks).

Let’s say you bought a property at $1 million. The LTV offered to you was 75%, which is equivalent to a loan of $750,000. After 2 years of repaying the loan, the outstanding loan amount is $650,000. However, the property market has been hit by a financial crisis; the value of your property is now $800,000. According to LTV ratio, your loan amount should be $600,000. In this scenario, the bank will most likely request you to make up for the differences of $50,000 to bring the LTV ratio back to 75%.

Who is at risk?

Private property owners have a higher risk of getting a margin call as prices of private properties are more volatile than other properties. In other words, private properties will be greatly hit during a financial crisis.

It would be best to not purchase a private property during a market upcycle as the prices of property are greatly inflated. This will increase your chances of getting a margin call when the market goes down.

How to prevent this from happening?

Despite the fact that margin calls are not common in Singapore, it is still important to know how to prevent yourself from getting into a mess with a margin call.

1. Read the terms and conditions carefully before signing the papers. Know what are the conditions that could possibly cause a margin call on your home loan.

2. Do not borrow up to the maximum LTV ratio especially when you are buying at a skyrocket price. The chances of you getting a margin call will be smaller if your loan amount is small.

3. Prepare a buffer amount which is immediately accessible if you are required to top up for differences.

4. Pay off all your existing loans on time to maintain a good credit score. This will allow you to negotiate with the bank if they ever exercise a margin call on your home loan. Another way would be to keep your Total Debt Servicing Ratio within 60%.

Contact Mortgage Consultancy now to get the smartest financial bank loan advice specifically for your home. We are able to provide more than 100 loan packages from 16 banks for you to compare and choose from! Feel free to contact us at +65 8556 5271 so that we will be able to help you make an informed decision, suited to your needs.

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