margin call when property price drop?

Discussion in 'Loans & Mortgage Brokers' started by fumid, 19th Oct, 2016.

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  1. WattleIdo

    WattleIdo midas touch

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    Nah uh o_O
     
  2. dabbler

    dabbler Well-Known Member

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    What I mean is, margin call is what happens in share markets and is common, or normal, expected etc.

    I admit I have not read every lenders loan documents, but the ones I have read I have never read "margin call", and, if I did, I would go to another lender.

    The whole point of buying resi property is this is not the common practice, otherwise better off doing commercial or indeed, shares as it returns better.

    Who was the lender BTW ?
     
  3. SouthBoy

    SouthBoy Well-Known Member

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    @Peter_Tersteeg how can this be profitable to the bank, if customers have many properties (IPs) with LVR of 200% and above, wouldn't they just stop paying their mortgages and force a foreclosure.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Lenders have costs associated with setting up a loan but ongoing costs are minimal. They'd have a period of time over which the loan becomes more and more profitable. If you can't refinance the loan elsewhere, but you can afford to keep paying the mortgage, the banks profit will increase over time.

    We've also seen over the last few years that older loans are becoming more expensive than current offers. If you can't refinance, your only option is to renegotiate rates with the existing lender to compensate for this. With a negative equity position, your bargaining power is almost nothing.
     
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  5. Tekoz

    Tekoz Well-Known Member

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    Cool, thanks man !
    Yes, I'm using Offset account.
     
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  6. Creamy

    Creamy Well-Known Member

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    This is something I'm quite worried about. I'm in the accumulation phase and I'm playing in booming markets as it allows me to accumulate assets much faster, however I understand there will likely be a correction at some point. My cba loan doc does have a bit that sounds like margin calls.

    Is the mitigation for this to just have a lot of cash available if they need it?
     
  7. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    The mitigant is if you meet the contractual agreement to pay on time you will be fine. Having "a lot of cash available" is good either way but dont give it to the bank, keep it in your offset account for maximum control.
     
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  8. See Change

    See Change Well-Known Member

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    They don't use the term " margin call " , but clauses such as those kinnon posted on the first page have the same effect . I think most mortgages have similar clauses in them .

    Cliff
     
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  9. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Mortgages have a ton of clauses in them that are in the banks favor but the vast majority will only be activated if you stop paying or neglect to call the bank to work out a hardship plan as they all have one by law.
     
  10. Shawn

    Shawn Well-Known Member

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    Banks have 2 income sources from Home Loans.

    Fee Income - The Annual Fee & Establishment Fee, amongst many other ad-hoc fees charged to you for services provided by them.

    Net Interest Margin - The Interest margin they clear from the wholesale cost of funding through to the rate you pay.

    I do not believe banks track the LVR of their portfolio actively (or not at all!) PM me if you'd like further details on this.

    Now, in the scenario that LVRs went ridiculously haywire and all of the bank's customers (Imaginary Bank) had an average LVR of 200%. This would mean the following :

    The bank has loaned out $100 billion AUD on properties that are now worth $50 billion AUD.

    Moving on, if there has been no increase in the % of defaults on the book, there would be no need to go out and individually value the loans and force what would most likely be foreclosure on these homes UNLESS

    - Sources of funding called and they want their money back.
    - Wholesale rates have increased and bank is holding off an interest rate rise (very unlikely)
    - Senior Management are ******** their pants that they've got to write things in their annual reports which state : Loan to Value Ratio has increased 80% last year to 200%, with loan repayments remaining consistent over this time.
    - ASIC comes around and says : Maximum Loan to Value Ratio of any bank's loan portfolio should be 100%. Banks will be penalised $1mn a month for each % of their loan book that is over the 100% LVR.

    Also remember, valuing homes costs the bank money. The cost of individually carrying out either a Desktop valuation or a Full Valuation costs resources, or money ; banks are hesitant to spend if they don't need to.

    On to the contracts, these are documents written by Counsel who have a mandate to ensure they've got as much power as possible to do as much or as little as they need if & when they need. Whether or not the bank has the infrastructure to back it up, is a completely different question.
     
  11. dabbler

    dabbler Well-Known Member

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    I never heard of any of them doing anything, even in the bad old days, as long as you pay and are on time, these days they even have to abide by/follow certain rules.

    Let's face it, would be pretty unattractive for nearly everyone if they were to act as they do with shares.

    You avoid the risk by paying.
     
  12. Creamy

    Creamy Well-Known Member

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    I'm curious why it seems to differ between shares and residential property. Is it due to the volatility of shares? There are many stories where investors were meeting repayments on a margin loan, yet were margin called. Sounds like it's the same for commercial property.
     
  13. noogie60

    noogie60 Well-Known Member

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    Politics- it would look very bad for banks to be forclosing on Mum and Dad households. They would have the media all over them like a bad rash and pollies baying for blood before you can blink.
    Shares and commercial property are seen differently- you get into those at your own risk.
     
  14. dabbler

    dabbler Well-Known Member

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    The volatility, the low amount they will loan tells you something, then you have it right in front of you, they tell you what they will do, anyone taking a margin loan should know & when your sitting there and the market is tanking & they send you a nice letter saying pay up, the pressure is on.

    I think this is where the saying applies for banks will hand you an umbrella on a fine day, and demand it back when pouring, cause they do exactly this.

    Margin calls are not a maybe, when it is going down, they intend for you to go down before them :)
     
  15. albanga

    albanga Well-Known Member

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    This post interests me.
    If you know you are playing in a booming market and know a correction is inevitable, then why would you play?
     
  16. Creamy

    Creamy Well-Known Member

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    Because no one knows when the correction is coming. Could be this year or the next or 5 years. At the price point I bought at (400k) I think any losses will be minimal. Pros outweighed the risks.
     
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  17. Wealth Effect

    Wealth Effect New Member

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    So you get into residential property @ someone else's risk? Or no risk at all?
     
  18. tobe

    tobe Well-Known Member

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    Sounds like your friend might have secured business/commercial loans against her property, and that's what trigger the margin call.
     
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  19. wylie

    wylie Moderator Staff Member

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    It's much easier to know exactly the value of a parcel of shares than know the exact value of a property.
     
  20. PandS

    PandS Well-Known Member

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    Margin called is when your share portfolio drop below the required margin, got nothing to do with you meeting the loan repayment or not, the rule of margin lending is your portfolio always need to stay above that line, once it dropped below that you got to top up cash to bring it above that line

    the stock market is a different beast and it fast and furious.
    margin lending is really reserved for experienced investors, who got their risk map out can meet margin called without their position getting liquidated.

    I do a lot of shorting on margin and it fast easy money but I got ample cash to backup if
    the position moved against me and I face a margin call, some day I can make 2K-20K other day
    I face a position move against me and when I am reasonably sure I got it right it just the timing is wrong so I have lazy 50K lying around to counter the move and buy me sometimes time until my short done its job, sometimes I can have a short 10K down to make 5K profit within a week.