What happens if house value drops below loan limit ?

[watchlist88]

Hi there, I recall that in the last property crash in 1997 some private home owners defaulted on their loans because the value of their homes were dropping so much that the actual value of their home was lower than what they owed the bank. So the bank asked them to increase their monthly instalment or have to redeem in cash to reduce loan amount. This is so that the banks can reduce their exposure to non performing loans if it ever happens. However, there were some that could not do it as they were over leveraged and got no spare ammunition. The banks repossessed back those homes in the end.

Example of someone who bought a house at $1m and loaned $800k for 30 years. He has to pay a monthly instalment of $3500 at 3.5% interest. His salary is $6000 which is close to a TDSR of 60% assuming he got no other loans. But house value drops to maybe $650k in worst case scenario and now he still owes $800k to the bank so the bank ask him to reduce loan amount by $150k or increase his monthly instalment ?

Will the banks do this again in worse case scenario ? Advise from those who have experienced the previous property crash in 1997 appreciated. I am not saying it will happen again but just doing some planning for unforseen circumstances. Thanks.

[pmet]

It will happen. Just sell at 15% below market price to cut loss if you think you cannot take the margin call. You will loose much more if foreclosure happens!

[wt_know]

in theory ... margin call for top up ... but this seldom occur
as long as there is no default in loan repayment ... bank probably will not re-rate the loaner as high risk
$1M to $650K is 35% crashed ... for $1M property which is mass market ... don't think so
if a $1M mickey mouse private condo drop to $650K ... EC > DBSS > BTO ... will crash until previous buyers all "squeeze balls" until explode liao
any drop in private condo will have knock on effect
high end property will drop more in term of quantum and percentage

[watchlist88]

wt_know stated that lower priced ones ones will not drop that much is acceptable. What about we up the stakes to a $2m unit and it drops to $1.4m and the guy still owes $1.6m to the bank and the margin call is for $200k top up, it can happen in worst case scenario right ? Any views from experts .... maybe Mortgage Guru can help ?

[Arcachon]

Hi there, I recall that in the last property crash in 1997 some private home owners defaulted on their loans because the value of their homes were dropping so much that the actual value of their home was lower than what they owed the bank. So the bank asked them to increase their monthly instalment or have to redeem in cash to reduce loan amount. This is so that the banks can reduce their exposure to non performing loans if it ever happens. However, there were some that could not do it as they were over leveraged and got no spare ammunition. The banks repossessed back those homes in the end.

Example of someone who bought a house at $1m and loaned $800k for 30 years. He has to pay a monthly instalment of $3500 at 3.5% interest. His salary is $6000 which is close to a TDSR of 60% assuming he got no other loans. But house value drops to maybe $650k in worst case scenario and now he still owes $800k to the bank so the bank ask him to reduce loan amount by $150k or increase his monthly instalment ?

Will the banks do this again in worse case scenario ? Advise from those who have experienced the previous property crash in 1997 appreciated. I am not saying it will happen again but just doing some planning for unforseen circumstances. Thanks.

Bank will confirm do the call.

First ask yourself what are you buying. New Build or resale.

If New Build, what is the Land Cost, building Cost, Developer profit.

If resale, what is the delta of the New build and factor which add value to the property.

[Kelonguni]

In the worst case scenario, it can indeed happen. Perhaps for some strata it's already happening. Generally it's more relevant to luxury properties as the debt servicing framework appears to have hit them the hardest.

A $1 million property (loan of 800K) requires a nett servicing of $3,600 (assuming 30 year loan of 3.5%) to meet the TDSR of 0.6. Probably $1,500 to $2,000 per month can be paid by CPF (assuming is single buyer). The income to service this is roughly $6,000 (assuming no other loans).

In order for the property to fall to 650K, we have to assume no buyers until the price drops to 650K. The buyers that qualify for the loan of this crash price just needs to service at $2,350. The income to service is $4000 (assuming no other loans). Again, some $1,000 to $1,500 of CPF per month can be used to pay for the mortgage (only assuming individual).

So do consider the pool of people who qualify to buy private and are potential buyers, typically double income families and well to do singles. For private, we also have to factor in HDB upgraders, the profits of which differ from one individual to the next.

Then calculate upwards to $2 million property and assess the pool of potential buyers and their holding power to derive your own conclusion. We have not even started to consider those who own multiple properties, some which have been fully paid off.

[watchlist88]

So far the concensus is that banks will call for the top up if situation warrants it. And so when shit hits the fence, it hits the high end and high quantum properties much harder and if you do not have holding power by having spare monies, better to sell it off at a lower price than for bank repossession to happen. For those buying high end or higher quantum units, this has to be planned into the long term horizon. Global economic events can have a lasting impact on Singapore and/or Asia. We were fortunate to be spared of the US subprime and the Euro crisis in recent years. Ever wondered what can happen to our housing prices if an Asian Financial Crisis ever were to occur again ?

Not over-leverage oneself and find out the painful lesson if that day ever comes if you want to sleep in peace. At least that is what I hope to do as a property owner or investor. Thanks to all for your kind inputs.

[wt_know]

that explains why some high end owner or investor sell their penthouse cheaply ... lose millions
either they need the money to re-invest or don't want to hold on to it