Will Banks Force You to Top Up Your Home Loan if the Property Market Crashes?
You know how you never actually get around to reading the Terms and Conditions before you click “I Accept” or sign on the dotted line? And as a result, you don’t know whether you just signed away your privacy on Facebook and Instagram, or accepted that Google will essentially know more about your lives than your parents, or sold your soul to the devil (whether you believe in that or not). In the same way, with home loans in Singapore, you might have missed out this little detail called an on-margin call.
Now, we’ve talked about on-margin calls in the context of home loans before. Basically, it refers to a scenario when, due to a drastic property slump, the market value of your property drops. For example, the value of your property drops to a point that your outstanding home loan either exceeds your Loan-to-Value ratio, or worse, exceeds the value of your property. Depending on how the bank interprets the rules for on-margin calls, they can require you to pay the difference.
Wait… I still don’t get it. How does an on-margin call work?
Say you have a property worth $1 million. You take out a home loan to buy it, and after a few years servicing the loan, you still owe $700,000.
Suddenly, the property market crashes, and the value of your house plummets. The bank conducts a valuation, and it determines that your house is now worth only $600,000. This is less than your outstanding home loan of $700,000!
The bank can then choose to issue an on-margin call, and you would need to top up the difference of $100,000. You can do this using either cash, or your CPF.
Wah, that’s serious! How often does this happen?
The last time property prices plummeted was back in 2008 during the global financial crisis. However, there is some fear that property prices may bottom out by middle of next year, as a result of the several cooling measures that have been introduced by the government. To get a better idea of the situation, we sought out the expert opinion of Stanley Tan, who leads an associate team called Principium within PropNex Realty.
1. Stanley, is the Singapore market at risk of a sudden drop in property prices?
The only times that our property prices have suffered downside shock (-15% to 20%) have been against the backdrop of global events – the 1997 financial crisis, the dotcom bust in 2000, SARS in 2003, and the 2008 global financial crisis.
Outside of these major events, our property prices usually level off after a 5% to 10% drop. Why? Because sellers still have the holding power. This is even more so today than before 2000 because the government has since set in place measures to prevent such drastic drops.
2. So should we homeowners be worried about banks issuing an on-margin call soon?
Let’s put it this way – even in those instances where major external events rocked our property prices, banks have generally not asked most people to top up their loans with cash.
3. But there are people who may be at risk?
Yes, there is a segment, to whom I refer to as those on the margin, where their Loan-To-Value ratios have become so lopsided that their banks do call for cash. These are usually owners of luxury properties that suffer the most price volatility. But this will not happen to the majority, because the mass market prices are not so volatile.
More importantly, it is not in the banks’ interest to enforce this cash call on a wide scale, because most homeowners would probably have problems raising the cash. If people can’t pay the on-margin call, the banks will be forced to impose penalties on the homeowners. This could include repossessing and offloading the properties. On a large scale, this will force the property market into a further downward spiral.
More importantly, this means the banks would have to take a 20-30% valuation loss on their loan books as they repo and force the sale of properties. Can you imagine such a scenario? I cannot.
4. So what, in your personal opinion, should homeowners do now to avoid on-margin calls?
Keep your jobs, be smart about your property choices, and save. The property market isn’t going anywhere for another 4 to 5 years.
Do you still have concerns about the Singapore property market? Share your thoughts with us.