05/11/2020 Margin calls: Possibly the most overlooked risk in high-quantum properties, Money News - AsiaOne

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Margin calls: Possibly the most overlooked

risk in high-quantum properties
NOVEMBER 02, 2020 PUBLISHED AT 11:29 AM
By RYAN J ONG | STACKEDHOMES

Stackedhomes

You could say that the Singapore private property market has left many people
puzzled. Despite Singapore seeing its worst recession in over 55 years, home
sales and prices are rising across the board.

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Urban Redevelopment Authority.

PHOTO: The Straits Times

HDB resale flats are at a 10-year high (volume wise), landed home sales are up
50 per cent, and private home prices continue a steady rise , quarter after
quarter.

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Read the condensed version of this story, and other top stories with NewsLite.

Chalk it up to the reputation of Singapore properties as a safe-haven

investment, or low interest rates (we detail it more here ), but there’s no
doubting the rising numbers.

However, this situation also means it’s time to sound an alarm bell: That’s the
often-overlooked risk of margin calls.

While these are rare for mass-market properties, the potential of facing one
rises along with the quantum; and particularly at stake at the high-end luxury
and landed homes (both of which are more popular in this pandemic
environment).

What’s a margin call?

A margin call is when your bank requires you to top up your home loan. In
effect, the bank has decided to lend you less than initially agreed, and is asking
you to reduce your loan quantum.

The exact conditions in which your bank can do this are in the terms and
conditions of your home loan. However, it mostly happens under two
conditions:

1. Your property value is deemed to be lower than your outstanding

loan amount
Say you own a luxury property, with an outstanding home loan of $1.5 million.
Due to a downturn in the property market however, your home falls to a value
of $1.4 million. The bank can ask you to top up the difference of $100,000.

2. Your property value is much lower than the Loan to Value (LTV)
ratio allows
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05/11/2020 Margin calls: Possibly the most overlooked risk in high-quantum properties, Money News - AsiaOne

The maximum amountLATEST

that NEWS
you can borrow for your property
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is 75 per cent of
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the price or value, whichever is lower. A steep fall in property values can result
in your LTV ratio being higher than 75 per cent, so a margin call is used to
correct that.

For example, say you have a property that – after a real estate downturn –
plunges to a value of $2 million. Your outstanding home loan is $1.6 million.

Your maximum loan quantum, however, should be $1.5 million (75 per cent of
your $2 million property). This would result in a margin call, for you to top up the
$100,000.

You can pay for the margin call using either cash, or your CPF (although you’ll
have to contact CPF to explain your situation, and provide the supporting
documents).

The terms and conditions regarding margin calls can vary

significantly between banks
For example, some banks may give you 60 days to respond, others will only
give you 30 days. Some banks specify when exactly a margin call will occur
(e.g. when the property value falls by a specified amount), others can issue a
margin call as and when they deem fit.

In all cases, failure to make the margin call can result in foreclosure. As such, it’s
important to know the terms, especially if you’re taking a loan for a high
quantum property (luxury or landed).

Why are high-quantum properties at greater risk?

It’s due to greater volatility. Have a look at the following, where you can see the
price movement of high-quantum condos ($3 million or above), versus the
prices of condos in general.

This is the quarterly movement from 2005 to the present:

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PHOTO: URA, Realis LATEST

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Between 2008 to 2009, in the wake of the Global Financial Crisis, high-end
condos plunged 49.7 per cent.

After the slew of cooling measures in 2014, prices plunged 38.2 per cent.

More recently, trade war worries brewing in 2018, coupled with a fresh round
of cooling measures, again sent prices down by 34 per cent.

For buyers who were unfortunate enough to purchase near the peak, the
resulting price plunges could have been sufficient to trigger a margin call.

The prices of the condo market in general, however, are much less volatile. Most
“regular” or mass-market properties are at little or no risk of margin calls – it’s
just rare for the average property to suddenly lose over 30 per cent of its value.

How do you avoid the possibility of a margin call?

Borrow less than the maximum allowable quantum
Stick to less volatile properties
Maintain a good credit report
Don’t buy at property peaks

1. Borrow less than the maximum allowable quantum

You don’t have to use the full 75 per cent LTV, just because it’s available. The less
you borrow, the less the likelihood of your property value falling below the
allowable LTV.

This may be out of the question for some investors though, as for many of them
a key draw is leverage (they want to use as little of their own money as
necessary, especially given the low interest rate environment). As such,
investors may need to take additional precautions, such as having savings to
tide over such possibilities.

For homeowners, do consider taking a smaller loan if you can. Not only does it
help to avoid margin calls, it means you’ll pay a bit less every month.

2. Stick to less volatile properties

PHOTO: Stackedhomes

We’ve mostly covered this above, where we discussed volatility.

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If you choose to go for a high

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quantum unit, do so with
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the awareness
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of what
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you’re getting into. Volatility is an especially real concern due to the Covid-19
situation. In the last crisis, for instances, luxury property prices plunged sharply
before recovering.

3. Maintain a good credit report

There are many cases where – despite property values falling sharply – banks
have decided against issuing a margin call. The bank can decide to wait a bit,
and see if your property values recovers.

For the most part, this decision is based on how reliably you pay your home
loan. If your mortgage is already in arrears, or the bank knows you’re heavily in
debt, a margin call is more probable.

4. Don’t buy at property peaks

This is easier said than done. But if you’re buying a luxury property, it’s best to
really ensure you are financially sound and that you pick the right property.

This requires you to monitor the overall market, and know the transaction
history of the units you buy.

Just because it’s unlikely, doesn’t mean it won’t happen

Some bankers and agents may handwave the risk of margin calls. A common
saying is that banks prefer not to do it, as any resulting foreclosure would be
costly to them.

While true, this fact should be treated as immaterial. When a margin call does
happen, you have one to two months to pay up a sizeable amount; it makes no
practical difference whether or not the bank likes doing it.

As such, it’s advisable for all property buyers – but especially those purchasing
high-quantum properties – to be aware of the risk. Do have additional savings,
in the event that it happens.

We feel it’s an important consideration right now, just in case the Covid-19
situation causes the market to reverse course.

For more updates and tips on the Singapore property market, follow us on
Stacked . You can also check out the latest condo offerings with our in-depth
reviews.

This article was first published in Stackedhomes.

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