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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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05/11/2020 Margin calls: Possibly the most overlooked risk in high-quantum properties, Money News - AsiaOne
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.
Read the condensed version of this story, and other top stories with NewsLite.
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).
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:
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
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).
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).
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05/11/2020 Margin calls: Possibly the most overlooked risk in high-quantum properties, Money News - AsiaOne
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.
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.
PHOTO: Stackedhomes
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.
This requires you to monitor the overall market, and know the transaction
history of the units you buy.
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.
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