margin call when property price drop?

A margin call is a broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.
Margin calls occur when the account value depresses to a value calculated by the broker's particular formula.

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.

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My question is, what do you think of this and if any margin calls happened in Australia before?

 

Margin Call on Property

 

IMO If it hasn't happened in mining towns, then it won't happen elsewhere.

 

Residential mortgages (investor and OO) don't have any clauses enabling a "margin call".

Think through this supposed mechanism:

The bank would have to revalue your property. They'd have to advise you at some point this was happening. Does that require internal access?

They reval and make their demand. Most people can't pay so you go to repossession and sale.

The media discover this.

Nope.

Also, are the banks checking every address they have a loan to? Gladstone is in serious trouble then...

I've seen people talk about the margin call or "top up" but I've yet to see anyone post the clause from their mortgage that enables such behaviour.

 

What are you talking about, does you loan contract have a section on margin calls ?

 

Haven't heard of it happening in residential property , But have seen it happen with commercial . ( hence one of the reasons why I'm not interested in it ) .

An acquaintance was bankrupted during the GFC when his bank decided he needed more equity in his multimillion dollar commercial portfolio on sydney's northern beaches , despite never missing a payment .

Cliff

 

If you check the fine print of your mortgage , you might be surprised what's in the fine print of some ....

Cliff

 

Never read "margin call" in any of them, I know they can do all sorts of things though if they want & especially if in default, but the very reality of no margin call as known when in the share market is why property is more suitable to some of us. Even if you get behind most wont call in the loan if your up front with the lender.

 

Yes they do. Whether they actually enact upon it is another matter entirely.

From nab's mortgage lending T's&C's:
"
Cancellation and reduction of the facility limit and credit limits
4.8 Despite clause 15, we may reduce or cancel the facility
limit and any credit limit at any time whether or not you
are in breach of this facility agreement. We will also reduce
or cancel the facility limit and any credit limit where you
request us in writing to do so.
(a) Where we reduce the facility limit or any credit limit:
(i) we will give you written notification of the limit
reduction as soon as practicable;
(ii) you must immediately repay enough money to
ensure that each credit account does not exceed
the reduced limit(s); and
(iii) you must still meet all of your obligations under
this facility agreement in relation to your credit
account(s).
(b) Where we cancel the facility limit:
(i) we will give you notice of the cancellation as
soon as practicable;
(i) the facility limit and any credit limit will reduce
to zero; and
(iii) you must immediately pay the total owing.
4.9 Once you have repaid the total owing, the credit
account(s) will be closed.

15. Review
15.1 We may conduct a review of the operation of your loan
account and credit account(s) and your financial position.
The review may be conducted at any time, and, in
relation to credit account(s), it will generally be conducted
at least annually. Following a review, we may vary this
facility agreement, including by:
(a) changing your principal and interest repayments under
clause 11.5 to ensure that that the total owing is repaid
within the loan term; or
(b) reducing or cancelling your facility limit and any credit
limit in accordance with clause 4.8."

 

@Kinnon Bell - this clause (or similar) is frequently used for unused credit with a LOC which reduces annually. This is to the bank's advantage, freeing up capital to reloan where other clients require funding.

 

This also happened to me during the GFC
I was required to obtain new valuations (commercial properties) and then requested to increase principal payments. (Wanted $1m per year reviewable in 24mths)
If I had not had TD (term deposits) I may well have had to sell at a low or loans withdrawn.
After this situation i always keep a $2m in cash reserves (8mths of net rental)

 

And so many people fly by the seat of their pants with minimal buffers. Everything would turn to poop if the banks started pulling in loans for many investors.

I had the driving seat a little while back when I could only offer a 1 year renewal (due to certainty of funding) - the owner was being screwed by the bank and we ended up with a longer lease at >10% rent reduction. It was all about security of tenure for the bank.

 

That is why a lot won't get into commercial.

 

Happened to a friend of mine in the GFC - on a one bedroom flat.

 

Where was that?

 

Could've been Landsdowne or Lansvale or high demand area somewhere is the SW on a railway line. The place only cost her 165K a few years prior.
Actually Canley Vale, I think.

 

Don't see it happening for the masses - I'm sure the valuation companies wouldn't mind.
Would throw everything into kaos
- time taken to complete all the valuations
- accept the valuations
- dispute the valuations
- if issues enforce the call and sell up
- costs of doing this
- then sales now lower
- which impacts further valuations
- now just spiral...

Pretty sure the banks are happy most of the time as long as you're making your repayments

 

If you keep your contractual obligations which in a nutshell is making your payments on time then you should be ok but as outlined there are exceptions. I cant see a bank doing a "margin call" on someone who is still making payments as the media cold and probably would have a field day if this started happening.

Only ever had one customer in the years I have been doing this that wanted me to go through the T&Cs of the mortgage with a fine tooth comb. If you want the dosh you need to agree.

 

Sadly I have a couple of clients who purchased properties in minding towns back in 2011. They borrowed at 80% LVR on the purchase price. Today the LVR is about 340% on the current valuation.

They have not had anything like a margin call on the properties.