The bank calling in a loan

Discussion in 'Property Finance' started by wrigs, 22nd Nov, 2018.

Join Australia's most dynamic and respected property investment community
  1. wrigs

    wrigs Member

    Joined:
    5th Dec, 2017
    Posts:
    23
    Location:
    Sydney
    A question for all the brokers.
    Under what circumstances might a bank call in a loan for a residential property? Theoretically and realistically.

    I’ve heard that sometimes banks call in loans, say, in a mining town. If the boom is over and the bank is concerned the loans won’t be repaid due to a fall in property prices the bank may call in a loan.

    Has anyone ever heard of this happening to residential properties in capital cities? Maybe if the property is highly leveraged (eg. 100% or 90% LVI)? With property prices in Sydney and Melbourne slipping and expecting to slip further, this is something that I have considered. How likely are banks to start calling in loans and under what circumtances? Anyone else concerned about this?
     
  2. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

    Joined:
    18th Jun, 2015
    Posts:
    19,064
    Location:
    Remote
    breach of the terms of the agreements.

    I have never heard of a bank calling in a residential loan because of a drop in value. It would be extremely unlikely that it would happen for that reason alone.
     
    kierank and Lindsay_W like this.
  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    8,113
    Location:
    Sydney
    A mortgage contains terms which limit the instances when the bank can sell

    The most obvious is default. They will sell to limit their loss. Other than this the bank normally cant sell your property after all the may hold the security but its not their property unless the terms of the mortgage agreement arent complied with so the lender becomes a mortagee (in default). You may have other resources to pay the loan and no lender can assume you cant meet repayments.

    That said a lender can assess a borrower as risk of default based on its value. Then they may seek additional information to determine if they can identify a lending risk and may suggest sale to avoid a default. But they cant force the issue. They can for some more complex comercial debts which are revolving finance eg bank bill commercial facilities etc. Many commercial loans have debt covenents where they can withdraw the finance and ask for repayment if sale drop or other business changes occur. Consumer lending laws dont allow this.
     
    Lindsay_W likes this.
  4. TAJ

    TAJ Well-Known Member

    Joined:
    10th Oct, 2017
    Posts:
    422
    Location:
    Northern NSW
    If the borrower is meeting their end of the bargain and paying off the loan, why would the bank call the loan in?
    It may be different if the borrower falls into arrears, no doubt.
     
    Lindsay_W likes this.
  5. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

    Joined:
    19th Jun, 2015
    Posts:
    2,463
    Location:
    NSW
    I've had a past client during the GFC with a lot (many $M's) of exposure to one bank (Lesson - never have all your loans with one lender). They asked him to reduce his LVR with them by tipping in more cash or selling one of his properties. That's the last thing you want to be doing - as most people don't have lots of cash sitting around and selling during a GFC is not an ideal way to get cash either :( - it can trigger CGT and not realise the true worth of the property, as you become an unwilling seller).

    At the end of the day, banks do not want to foreclose. They don't particularly care if you are sitting on negative equity as long as you are making payments. What are they going to do with your house of they repossess it anyway? They are in the business of making cash profits - buying money at x% and selling the money to you at x+y%, not stockpiling customers houses.
     
    kierank, Lindsay_W and TAJ like this.
  6. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    1,291
    Location:
    Australia
    Heard from who?
     
    WattleIdo and Terry_w like this.
  7. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    231
    Location:
    QLD
    Never heard of it happening, I reckon it's a myth, unless as Terry mentioned, you breach your loan agreements. Bank would lose money if they did that. *Edit (to refer to the post from Propertunity above, that's the issue when all properties crossed with one lender and difference is they have asked for reduction in LVR, not exactly calling in all loans to be repaid, still not a good outcome for client though)
    A standard term home loan is not the same as a Margin Loan or Line Of Credit which can be called upon to be repaid in full at anytime.
     
    Last edited: 22nd Nov, 2018
  8. wrigs

    wrigs Member

    Joined:
    5th Dec, 2017
    Posts:
    23
    Location:
    Sydney

    Alan, I'm really interested in your client who had loans called in during the GFC. Was the only reason this hapened that they decided his LVR was too high?
    Was he paying his repayments? And were they interest only repayments? Did he have a change in his serviceability that the bank became aware of?
    And it was definitely residential properties only, no commercial properties?
     
  9. wrigs

    wrigs Member

    Joined:
    5th Dec, 2017
    Posts:
    23
    Location:
    Sydney
    A friend who is interested in property. But I haven't heard from someone to whom this has happened, or even someone who claims to know someone to whom this has happened. I.e. it might not be true, but I thought I would flag it as a possibility just in case.
     
  10. TheSackedWiggle

    TheSackedWiggle Well-Known Member

    Joined:
    29th Jun, 2015
    Posts:
    874
    Location:
    canberra
    inspite of keeping up with repayments?
     
  11. wrigs

    wrigs Member

    Joined:
    5th Dec, 2017
    Posts:
    23
    Location:
    Sydney
    I agree, asking to reduce LVR can also be a bad outcome. How realistic is it that banks request a reduction in LVR? And again, under what circumstances would that happen? If you are making all of your repayments is that still a risk?
     
    Last edited: 22nd Nov, 2018
    Lindsay_W likes this.
  12. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,354
    Location:
    Adelaide, SA
    Was the client a business owner?
     
    WattleIdo likes this.
  13. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    231
    Location:
    QLD
    Unlikely, I'm not sure what would cause it to happen because I have never seen it happen personally, I believe they would much rather you keep making all repayments, they don't want to have to repossess and sell a dud security.
    Just recently had a client, Investment property worth $140K (purchased it for $490K) bank knew and did not care as long as they kept making the repayments, had been going on for years
    Maybe if they could see you had a bunch of other money lying around in offset/savings account they might be more inclined? .
     
  14. TheSackedWiggle

    TheSackedWiggle Well-Known Member

    Joined:
    29th Jun, 2015
    Posts:
    874
    Location:
    canberra
    then its same as a margin call, how is it different?

    even if it is stocks on margin, they never call in all loans to be repaid, they just ask you to come up with margin gap, problem is many don't have spare cash to cover this hence have to fire sale their shares at exactly the wrong time.

    In above case, assuming the property loan repayment was on time still banks called in come up with extra cash, that's as close to margin call as it can be.
     
    Last edited: 22nd Nov, 2018
  15. TheSackedWiggle

    TheSackedWiggle Well-Known Member

    Joined:
    29th Jun, 2015
    Posts:
    874
    Location:
    canberra
    :confused:
     
  16. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    1,291
    Location:
    Australia
    But not someone who owns property? How many of these possibilities do you worry about?
     
  17. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    231
    Location:
    QLD
    Margin calls are for shares and are a known risk when using a margin loan, term loans for houses are not the same, otherwise as soon as the property market dropped enough all banks would be asking for LVR's to be reduced. Without knowing the circumstances that made the bank ask for the reduction in LVR, in the example above, you cannot say it was purely based on falling property values
     
  18. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    231
    Location:
    QLD
    It's what happens when people get sold property in mining towns by property spruikers - not uncommon unfortunately, Buy for $490K - years later, mine shuts, worth $140K now
     
  19. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

    Joined:
    19th Jun, 2015
    Posts:
    2,463
    Location:
    NSW
    Yes
     
  20. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,354
    Location:
    Adelaide, SA
    I reckon you're on the money... my bet would be they had residential properties tied in the commercial... review period came around and bank asked to reduce overall LVR.
     
    [email protected] likes this.
  21. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

    Joined:
    19th Jun, 2015
    Posts:
    2,463
    Location:
    NSW
    Yes he had a business with an OD facility also with the same lender.
     
    Lindsay_W likes this.