In the make-believe world of Disneyland, beautiful princesses can sleep for a hundred years without ageing a single day, all creatures great and small know how to spell M-I-C-K-E-Y M-O-U-S-E, and happily-ever-after is not restricted to those with a golden retirement plan.
Unfortunately in the real world, bad things happen even if nobody wants them – wars, nuclear plant disasters, and Masters of the Sea (what do you mean, you’ve never watched Channel 5?). And if you have a non-HDB property loan, you’ll do well to find out what a margin call is.
So what is a margin call?
A margin call happens when the market value of your property falls significantly. If the value of your property depreciates to be less than what you owe the bank, you may be asked to pay the difference.
There are various ways a margin call may happen. Here are two common examples:
Scenario A: Topping up the difference between the outstanding home loan and property valuation
Let’s say you bought a condominium last year for S$1 million and took a S$800,000 mortgage loan to finance it. After servicing your loan for a year, you still owe the bank S$780,000.
Now assuming there is a property downturn and the bank decides to conduct a valuation of your house. It was determined that your house is now worth only S$700,000, which is less than your outstanding housing loan of S$780,000. The bank could then ask you to top up the S$80,000 shortfall, either in cash or by using your CPF savings.
Scenario B: Balancing the Loan-to-Value ratio
Suppose you bought a condominium for S$1 million. Your Loan-to-Value (LTV) ratio is 80 per cent, which means you can borrow S$800,000 to finance your purchase. After repaying your mortgage for a few years, you still owe the bank S$650,000.
Unfortunately, there is a property down cycle and the market value of your house falls to S$800,000. The LTV of your house is now S$640,000 (80 per cent of S$800,000).
In this case, you might be asked to top up the difference of SS$10,000 to bring your LTV back to 80 per cent of the market value. Again, you can make up the difference using cash or your CPF savings.
As part of the mortgage terms, you’d expect to find a clause that entitles the bank to conduct a property valuation as and when it deems fit. Different banks may have different rules for margin calls, so it’s advisable to check with your bank for further details.
Should you be worried?
The good news is, a margin call is unlikely to happen in Singapore, especially if you’ve been fulfilling your mortgage payment every month. To conduct a property valuation, banks have to commit substantial time, money and manpower, and they would be reluctant to do so unless in exceptional circumstances.
In general, a margin call would only happen during a sudden property market crash or sustained property down cycle, when property prices can drop by more than 20 per cent.
The last time a margin call occurred in Singapore was during the 2008 financial crisis when property prices fell drastically. Since then, MAS has introduced a series of measures to make the property application process more stringent.
Although the chance of a margin call occurring again is low, it’ll still benefit you to learn the ways of avoiding one.
Borrow within your means
Just because you’re allowed to borrow up to 80 per cent of the cost of the property, it doesn’t mean you have to. The less amount of money you borrow, the less likely you are to face a margin call.
For example, if you borrowed only 60 per cent of the property cost, the value of your property might have to depreciate by as much as 40 per cent before you get a margin call.
Find a good property
You’re unlikely to face a margin call if you purchase a property in Singapore – and the chances of that happening are even more remote if you stay clear of risky property investments (for example, buying a property with a lease that’s about to expire).
At Singapore’s leading property site PropertyGuru, you can find property listings with details such as size, location, tenure and more. With all the information you need at one glance, you can be more confident of making better property decisions. Begin your property search at www.propertyguru.com.sg
Save for a rainy day
You’ve probably heard this advice before, but you should keep an emergency fund with six months’ worth of your pay. This savings is meant to help you buffer against the unexpected such as medical treatments, a loss of income, and margin calls.
Barring a major financial crisis or property down cycle, it’s unlikely for a margin call to happen in Singapore again. So long as you continue to make your housing loan repayments on time, many banks would prefer to keep collecting interest from you rather than foreclose on your property.
Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
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