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Thread: How do recession and property refinancing affect you?

  1. #1
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    Default How do recession and property refinancing affect you?

    http://www.theedgeproperty.com.sg/co...ing-affect-you

    How do recession and property refinancing affect you?

    By Paul Ho / iCompareLoan | May 30, 2016


    The world is entering a phase of slower growth — this is perhaps one of the more dangerous periods of its history. Since the financial crisis of 2008, the world has become more leveraged instead of less.

    Between 2007 and 2014, global debt increased by US$57 trillion. Total debt has grown from 269% of GDP as at 4Q2007 to 286% of GDP as at 2Q2014.

    Government debt has grown at a compound annual rate of 9.3%, way faster than GDP growth. And following closely behind is corporate debt.

    The world’s total GDP is about US$70 trillion ($97 trillion). But most major governments are running budget deficits of between 2% and 5% of GDP. This means they are running a budget deficit of US$1.4 trillion to US$4.2 trillion. To put the numbers into perspective, US$4.2 trillion is about the annual production of the whole of Japan.

    Since borrowings are not directly used to stimulate spending and do not correspond to a proportional increase in GDP, rising debt is incurred when governments service debt-interest payment.



    Why is high debt a precursor to a recession?

    Many countries are seeing a faster increase in debt than in GDP. This means that global production has not gone up correspondingly with the growth in debt.

    For example, a government that incurs a budget deficit of, say, US$50 billion may use US$15 billion of that amount to service the interest payment of the debt. This leaves US$35 billion to be used for economic growth. That amount gets pumped into the economy to create investments or is spent on capital purchases (such as land, plants, machinery and equipment) and to hire people (to stimulate GDP growth).

    Based on Figure 1, you can see that much of the debt incurred by governments goes into servicing a current budget deficit, an existing debt and additional borrowing — if needed — which then goes towards stimulating the economy.



    Figure 1: Government’s flow of debt and deficit spending



    Corporate debt is also increasing at a faster rate than economic growth and corporations are becoming more indebted. The only bright side is that financial debt — that is, debt owed by financial institutions — is growing at 2.9%, which is close to economic growth.

    Many countries are already servicing so much debt that much of a year’s budget goes towards repaying and servicing a debt. This leaves little money for disposable spending to help the economy grow.

    Levying a low tax on the super-high-networth individuals does not help; the trickle-down effect is marginal as these people have a propensity to accumulate wealth and store them in tax havens rather than circulate the wealth (see Figure 2).



    Figure 2: Global economy starved of consumers as super-high-net-worth individuals hoard cash and assets



    As the global economy is starved of funding, income levels may not go up. Also, with corporations increasing their debt at a faster rate than that of GDP, this means they face the stress of reduced margins. That, in turn, could be the main cause of retrenchments.



    The US dollar — the Monopoly game-keeper

    The US dollar is the world’s pre-eminent currency. According to Stockholm International Peace Research Institute, the country’s military spending is more than the combined military spending of China, Saudi Arabia, Russia, the UK and India. The US’ military power, cultural soft power and non-governmental bodies influence the world we live in.

    Up until 2013, the US dollar made up about 60% of the world’s foreign exchange reserves. The International Monetary Fund’s special drawing right is a standby borrowing for countries with weaker fiscal positions to draw on in times of emergency. Effective from Oct 1, the IMF’s reserves will be weighted in US dollars (41.73%), euros (30.93%), renminbi (10.92%), yen (8.33%) and pounds (8.09%).

    Imagine you are playing a game of Mono poly and there is one player/banker and four other players. Each one has US$10, making a total of $50. One day, the player/ banker decides to print an extra $50 as he has run out of money. So, the total monetary amount in the game becomes $100.

    This is as good as stealing 50% of the money of the other players, who decide not to play anymore. What does the banker/player do? He borrows — and promises to pay the sum back one day. So, there is now $100 in the game and a holding of debt (-$50). The money in circulation is $100, while the debt is $50, with the net effect of $50. This is also known as quantitative easing. However, it has the same effect as printing money because the value of the dollars held by the other players is diluted while the debt is not repaid.

    Take the example of two poor people who have zero equity. One has $1 million in cash and a $1 million debt at 2% interest, while the other has zero cash but owes nothing. Which one is better off?

    The first person is in a better position because he can buy food and pay the bills, for the time being. In the same way, unless countries choose to default on their debt or simply print currency notes outright to repay their debt, their economy will get worse.

    Printing money is not a bad idea, as politicians like to kick the can down the road. But some say printing money will cause hyper-inflation. However, various countries have had rounds of QE, and there is hardly any inflation. In fact, we are facing deflation in Europe and Japan.

    Perhaps the world’s major economies can get together to print money to reduce their debts.

    Today, we have the productive capacity in industries and are largely not short of many resources. Hence, printing money to use up additional capacity and re-employ people is perhaps not a bad idea. Instead of borrowing money, a government could print money for capital-formation measures.



    Deleveraging is painful

    There will come a time when a debt has to be repaid. Deleveraging becomes imminent then and this will cause immense pressure as banks lend out less and the interest rate goes up.



    Are corporations doing well?

    Corporate debt is an area of concern. Singapore’s corporate debt-to-GDP has risen from about 100% in 2010 to 150% in 2014. Corporate interest coverage ratio has dropped from about 14 times to six times. This means that up till 2014, earnings before interest and taxes were six times those of interest payment.

    In the event of an economic shock, such as a 25% drop in Ebit and a 25% increase in interest costs, many companies may start to retrench.

    While the overnight interest rates benchmarks look likely to increase by 25% or more, the business interest rate is unlikely to go up that much as the interest rates for loans to small and medium-sized enterprises and other facilities already range from 8% to 20%. So, banks have the margins to absorb the increases. But will they?

    SPRING Singapore is preparing to launch a working capital loan on June 1, whereby local SMEs can borrow up to $300,000. SPRING will offer loan loss provisions to banks. This is an indication of a worsening economy.

    Not all companies will qualify for this loan as they still need to be profitable. Many of those companies facing hardship will perish, while some of those SMEs that qualify for this loan will stay afloat or grow to absorb excess retrenched workers.

    Trade, an important segment of Singapore’s economy, has been declining since July 2014. The shipping and logistics sectors have been hard hit, as has the oil and gas sector. Singapore’s Purchasing Managers’ Index has fallen under 50% for eight months in a row. The April PMI stood at 49.8%, indicating a decline in orders.



    Property prices are languishing

    Private residential property prices have fallen gradually in the last 10 quarters since 3Q2013.

    Many people will be hit by reduced rental income and higher interest payments. Owing to falling valuations, banks may be even more cautious about giving out loans. This pro- cyclical behaviour will cause more hardships to Singaporean households. When it comes time to refinance, a bank’s appointed panel of valuers may be so conservative that an outstanding loan may exceed 80% of loan-to-value.



    Refinancing woes will hit home soon

    The Total Debt Servicing Ratio was imposed in June 2013. Many people who are highly leveraged may have TDSR above 60%.

    The Monetary Authority of Singapore allows a transition period in which borrowers for residential own-stay and investment properties can exceed TDSR of 60% (subject to meeting certain conditions) when they refinance, until June 30, 2017. If you fail to meet the TDSR after that date, you will be slapped with an expensive interest rate when you are already financially under strain.

    Banks tend to offer rates that step up (for example):

    • Year 1 = Sibor + 0.75%

    • Year 2 = Sibor + 0.85%

    • Year 3 = Sibor + 1%

    • Year 4 onwards = Sibor + 1.25%

    Therefore, a person will be faced with the following risks:

    • Retrenchment,

    • Reduced salary,

    • Reduction of rental for investment property ,

    • Margin call risks on falling property valuations,

    • Increase interest cost, and

    • Business failure, owing to debt being recalled and credit lines being cancelled

    All these risks could hit you at the same time, just when you have fallen and need a helping hand owing to the pro-cyclical behaviour of banks. Hence, it would be wise to immediately convert to a rate that is stable and low, so there is no need to constantly refinance. Failing that, the consequences could be dire.



    Paul Ho is chief mortgage consultant of iCompareLoan. He can be contacted at [email protected].

    This article appeared in The Edge Property Pullout, Issue 730 (May 30, 2016) of The Edge Singapore.

  2. #2
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    teddybear is offline Global recession is coming....
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    Interesting golden words:

    Take the example of two poor people who have zero equity. One has $1 million in cash and a $1 million debt at 2% interest, while the other has zero cash but owes nothing. Which one is better off?

    The first person is in a better position because he can buy food and pay the bills, for the time being. In the same way, unless countries choose to default on their debt or simply print currency notes outright to repay their debt, their economy will get worse.
    What the above means is that forcing people to come out with more money for downpayment to buy their properties (e.g. lower LTV than necessary) is just plainly wrong and bad policy!!!!!!!!!!!!!!

    Again:

    Refinancing woes will hit home soon

    The Total Debt Servicing Ratio was imposed in June 2013. Many people who are highly leveraged may have TDSR above 60%.

    The Monetary Authority of Singapore allows a transition period in which borrowers for residential own-stay and investment properties can exceed TDSR of 60% (subject to meeting certain conditions) when they refinance, until June 30, 2017. If you fail to meet the TDSR after that date, you will be slapped with an expensive interest rate when you are already financially under strain.

    Banks tend to offer rates that step up (for example):

    • Year 1 = Sibor + 0.75%

    • Year 2 = Sibor + 0.85%

    • Year 3 = Sibor + 1%

    • Year 4 onwards = Sibor + 1.25%

    Therefore, a person will be faced with the following risks:

    • Retrenchment,

    • Reduced salary,

    • Reduction of rental for investment property ,

    • Margin call risks on falling property valuations,

    • Increase interest cost, and

    • Business failure, owing to debt being recalled and credit lines being cancelled

    All these risks could hit you at the same time, just when you have fallen and need a helping hand owing to the pro-cyclical behaviour of banks.
    We should be seeing property market crashing in near future, especially for OCR private properties as the general economy slows, job retrenchment increases and job creation drops significantly (the middle-income PMET jobs will always get hit with retrenchment first (anyway we are already see that now, as most retrenchment >65% are in PMET category)), foreigners intake already tightened and will drop further as more repatriated due to retrenchment etc, lower people looking to rent a property, those private condos at lousy locations will get hit first without tenants for months or even years, once these people have no money to service bank mortgage loans, their properties will be auctioned off at cheap price (they sure hope they have 20% extra cash by buying with 80% loan (i.e. 80% LTV) rather than 60% loan (i.e. 60% LTV) because of MAS subsequently introduced property cooling measure with lower LTV)!!!.................

    Quote Originally Posted by reporter2 View Post
    http://www.theedgeproperty.com.sg/co...ing-affect-you

    How do recession and property refinancing affect you?

    By Paul Ho / iCompareLoan | May 30, 2016


    The world is entering a phase of slower growth — this is perhaps one of the more dangerous periods of its history. Since the financial crisis of 2008, the world has become more leveraged instead of less.

    Between 2007 and 2014, global debt increased by US$57 trillion. Total debt has grown from 269% of GDP as at 4Q2007 to 286% of GDP as at 2Q2014.

    Government debt has grown at a compound annual rate of 9.3%, way faster than GDP growth. And following closely behind is corporate debt.

    The world’s total GDP is about US$70 trillion ($97 trillion). But most major governments are running budget deficits of between 2% and 5% of GDP. This means they are running a budget deficit of US$1.4 trillion to US$4.2 trillion. To put the numbers into perspective, US$4.2 trillion is about the annual production of the whole of Japan.

    Since borrowings are not directly used to stimulate spending and do not correspond to a proportional increase in GDP, rising debt is incurred when governments service debt-interest payment.



    Why is high debt a precursor to a recession?

    Many countries are seeing a faster increase in debt than in GDP. This means that global production has not gone up correspondingly with the growth in debt.

    For example, a government that incurs a budget deficit of, say, US$50 billion may use US$15 billion of that amount to service the interest payment of the debt. This leaves US$35 billion to be used for economic growth. That amount gets pumped into the economy to create investments or is spent on capital purchases (such as land, plants, machinery and equipment) and to hire people (to stimulate GDP growth).

    Based on Figure 1, you can see that much of the debt incurred by governments goes into servicing a current budget deficit, an existing debt and additional borrowing — if needed — which then goes towards stimulating the economy.



    Figure 1: Government’s flow of debt and deficit spending



    Corporate debt is also increasing at a faster rate than economic growth and corporations are becoming more indebted. The only bright side is that financial debt — that is, debt owed by financial institutions — is growing at 2.9%, which is close to economic growth.

    Many countries are already servicing so much debt that much of a year’s budget goes towards repaying and servicing a debt. This leaves little money for disposable spending to help the economy grow.

    Levying a low tax on the super-high-networth individuals does not help; the trickle-down effect is marginal as these people have a propensity to accumulate wealth and store them in tax havens rather than circulate the wealth (see Figure 2).



    Figure 2: Global economy starved of consumers as super-high-net-worth individuals hoard cash and assets



    As the global economy is starved of funding, income levels may not go up. Also, with corporations increasing their debt at a faster rate than that of GDP, this means they face the stress of reduced margins. That, in turn, could be the main cause of retrenchments.



    The US dollar — the Monopoly game-keeper

    The US dollar is the world’s pre-eminent currency. According to Stockholm International Peace Research Institute, the country’s military spending is more than the combined military spending of China, Saudi Arabia, Russia, the UK and India. The US’ military power, cultural soft power and non-governmental bodies influence the world we live in.

    Up until 2013, the US dollar made up about 60% of the world’s foreign exchange reserves. The International Monetary Fund’s special drawing right is a standby borrowing for countries with weaker fiscal positions to draw on in times of emergency. Effective from Oct 1, the IMF’s reserves will be weighted in US dollars (41.73%), euros (30.93%), renminbi (10.92%), yen (8.33%) and pounds (8.09%).

    Imagine you are playing a game of Mono poly and there is one player/banker and four other players. Each one has US$10, making a total of $50. One day, the player/ banker decides to print an extra $50 as he has run out of money. So, the total monetary amount in the game becomes $100.

    This is as good as stealing 50% of the money of the other players, who decide not to play anymore. What does the banker/player do? He borrows — and promises to pay the sum back one day. So, there is now $100 in the game and a holding of debt (-$50). The money in circulation is $100, while the debt is $50, with the net effect of $50. This is also known as quantitative easing. However, it has the same effect as printing money because the value of the dollars held by the other players is diluted while the debt is not repaid.

    Take the example of two poor people who have zero equity. One has $1 million in cash and a $1 million debt at 2% interest, while the other has zero cash but owes nothing. Which one is better off?

    The first person is in a better position because he can buy food and pay the bills, for the time being. In the same way, unless countries choose to default on their debt or simply print currency notes outright to repay their debt, their economy will get worse.

    Printing money is not a bad idea, as politicians like to kick the can down the road. But some say printing money will cause hyper-inflation. However, various countries have had rounds of QE, and there is hardly any inflation. In fact, we are facing deflation in Europe and Japan.

    Perhaps the world’s major economies can get together to print money to reduce their debts.

    Today, we have the productive capacity in industries and are largely not short of many resources. Hence, printing money to use up additional capacity and re-employ people is perhaps not a bad idea. Instead of borrowing money, a government could print money for capital-formation measures.



    Deleveraging is painful

    There will come a time when a debt has to be repaid. Deleveraging becomes imminent then and this will cause immense pressure as banks lend out less and the interest rate goes up.



    Are corporations doing well?

    Corporate debt is an area of concern. Singapore’s corporate debt-to-GDP has risen from about 100% in 2010 to 150% in 2014. Corporate interest coverage ratio has dropped from about 14 times to six times. This means that up till 2014, earnings before interest and taxes were six times those of interest payment.

    In the event of an economic shock, such as a 25% drop in Ebit and a 25% increase in interest costs, many companies may start to retrench.

    While the overnight interest rates benchmarks look likely to increase by 25% or more, the business interest rate is unlikely to go up that much as the interest rates for loans to small and medium-sized enterprises and other facilities already range from 8% to 20%. So, banks have the margins to absorb the increases. But will they?

    SPRING Singapore is preparing to launch a working capital loan on June 1, whereby local SMEs can borrow up to $300,000. SPRING will offer loan loss provisions to banks. This is an indication of a worsening economy.

    Not all companies will qualify for this loan as they still need to be profitable. Many of those companies facing hardship will perish, while some of those SMEs that qualify for this loan will stay afloat or grow to absorb excess retrenched workers.

    Trade, an important segment of Singapore’s economy, has been declining since July 2014. The shipping and logistics sectors have been hard hit, as has the oil and gas sector. Singapore’s Purchasing Managers’ Index has fallen under 50% for eight months in a row. The April PMI stood at 49.8%, indicating a decline in orders.



    Property prices are languishing

    Private residential property prices have fallen gradually in the last 10 quarters since 3Q2013.

    Many people will be hit by reduced rental income and higher interest payments. Owing to falling valuations, banks may be even more cautious about giving out loans. This pro- cyclical behaviour will cause more hardships to Singaporean households. When it comes time to refinance, a bank’s appointed panel of valuers may be so conservative that an outstanding loan may exceed 80% of loan-to-value.



    Refinancing woes will hit home soon

    The Total Debt Servicing Ratio was imposed in June 2013. Many people who are highly leveraged may have TDSR above 60%.

    The Monetary Authority of Singapore allows a transition period in which borrowers for residential own-stay and investment properties can exceed TDSR of 60% (subject to meeting certain conditions) when they refinance, until June 30, 2017. If you fail to meet the TDSR after that date, you will be slapped with an expensive interest rate when you are already financially under strain.

    Banks tend to offer rates that step up (for example):

    • Year 1 = Sibor + 0.75%

    • Year 2 = Sibor + 0.85%

    • Year 3 = Sibor + 1%

    • Year 4 onwards = Sibor + 1.25%

    Therefore, a person will be faced with the following risks:

    • Retrenchment,

    • Reduced salary,

    • Reduction of rental for investment property ,

    • Margin call risks on falling property valuations,

    • Increase interest cost, and

    • Business failure, owing to debt being recalled and credit lines being cancelled

    All these risks could hit you at the same time, just when you have fallen and need a helping hand owing to the pro-cyclical behaviour of banks. Hence, it would be wise to immediately convert to a rate that is stable and low, so there is no need to constantly refinance. Failing that, the consequences could be dire.



    Paul Ho is chief mortgage consultant of iCompareLoan. He can be contacted at [email protected].

    This article appeared in The Edge Property Pullout, Issue 730 (May 30, 2016) of The Edge Singapore.

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    This irrational market will go on another 20-30 years. Basic house price will not crash, that means OCR. People sitting outside the market will find themselves wasting their life away.

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    The only way for some people not to loan to max and keep some money with them as they purchase is to buy OCR.

    If they go for CCR, they will show hand with a single unit, max loan, and being homeless if they do sell.

    I am talking about myself. But for others may be different.
    The three laws of Kelonguni:

    Where there is kelong, there is guni.
    No kelong no guni.
    More kelong = more guni.

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    Hi Kelonguni bro, any exit plans for you then?

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    I think if the govt starts to remove some cooling measures, it will be to relax LTV for second and subsequent mortgages, as long as one can pass TDSR. ABSD is likely to stay as it doesn't hurt buyers because buyers will factor in ABSD and demand lower property prices. ABSD hurts developers because they have to give more discounts.

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    Quote Originally Posted by dreamer888 View Post
    Hi Kelonguni bro, any exit plans for you then?
    Master Kelonguni doesn't need any exit plans, MAS and Fed already plan for him indirectly.以不变赢万变
    Last edited by Citizen; 31-05-16 at 20:36.

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    Our property prices already artificially depress as compared to other countries. Our interest rate and loan ratio already well controlled. How bad can it go. Till now fed also dare not hike rate too fast don't even mention increase it higher. Sighs

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    If you study the impact of taxation on the price of goods and demand and supply curves, both the buyer and the seller kenna. It just feels like the developer bears it.

    Quote Originally Posted by Pynchmail View Post
    I think if the govt starts to remove some cooling measures, it will be to relax LTV for second and subsequent mortgages, as long as one can pass TDSR. ABSD is likely to stay as it doesn't hurt buyers because buyers will factor in ABSD and demand lower property prices. ABSD hurts developers because they have to give more discounts.
    The three laws of Kelonguni:

    Where there is kelong, there is guni.
    No kelong no guni.
    More kelong = more guni.

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    Quote Originally Posted by Citizen View Post
    Master Kelonguni doesn't need any exit plans, MAS and Fed already plan for him indirectly.以不变赢万变
    Thanks. Now also cannot 变 anymore.

    Everything in place. I also hope for higher growth and higher interests for economy sake, but can only satisfy myself with low growth and low interests in the meantime.

    Have a cup of guni!
    The three laws of Kelonguni:

    Where there is kelong, there is guni.
    No kelong no guni.
    More kelong = more guni.

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    Very pragmatic. Just let it auto run with all the backups in place.

    If one has at least 1 fully paid local property, is already more than enough backup exit plan.

    The next level of safety is still multiple loans, and let one settle by itself.

    Can hold 5 years super safe liao. Really really emergency then sell. So far cannot see exit yet.

    Quote Originally Posted by dreamer888 View Post
    Hi Kelonguni bro, any exit plans for you then?
    Last edited by Kelonguni; 31-05-16 at 23:14.
    The three laws of Kelonguni:

    Where there is kelong, there is guni.
    No kelong no guni.
    More kelong = more guni.

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    Yeah, I can't agree more with you. That's exactly what I feel also. Always felt it is essential to have a fully paid ppty when doing investing in another one.


    Quote Originally Posted by Kelonguni View Post
    Very pragmatic. Just let it auto run with all the backups in place.

    If one has at least 1 fully paid local property, is already more than enough backup exit plan.

    The next level of safety is still multiple loans, and let one settle by itself.

    Can hold 5 years super safe liao. Really really emergency then sell. So far cannot see exit yet.

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    Quote Originally Posted by dreamer888 View Post
    Yeah, I can't agree more with you. That's exactly what I feel also. Always felt it is essential to have a fully paid ppty when doing investing in another one.
    That's number 1 safety level but not one the Govt encourages currently. The draconian measures make it very difficult for most people to do this.

    If you ask some others like Arcachon, multiple ongoing loans work as well. Still pretty safe provided you have had 1 property with loans bought before 2010.
    The three laws of Kelonguni:

    Where there is kelong, there is guni.
    No kelong no guni.
    More kelong = more guni.

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    Sell also cannot buy, then why sell.

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    Oh well.. they said government is actively monitoring the uncertain economic situation this year. Hopefully it will not be a downturn as severe as the 2008 global financial crisis.

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    Quote Originally Posted by Dave-Phils View Post
    Oh well.. they said government is actively monitoring the uncertain economic situation this year. Hopefully it will not be a downturn as severe as the 2008 global financial crisis.
    If the crisis ever come, I think it will be worst than before because fundamentally we have not recovered from the previous crash. There is so much money in the market and QE. I think the rally is not sustainable.

    May I know under what circumstances will bank do a margin call on my property? When the valuation price drop by more than 20% of my loan or they will not as long as I continue to pay my mortgage?

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    Quote Originally Posted by htng View Post
    If the crisis ever come, I think it will be worst than before because fundamentally we have not recovered from the previous crash. There is so much money in the market and QE. I think the rally is not sustainable.

    May I know under what circumstances will bank do a margin call on my property? When the valuation price drop by more than 20% of my loan or they will not as long as I continue to pay my mortgage?
    Maybe if it is during refinance and need to change conditions of loan to maintain TDSR.

    Generally, based on your current mortgage conditions and provided you can service the loan based on prevailing conditions, a margin call is only possible once the valuation drops over 20% and one has just barely started serving the first few percent of the loan.

    http://blog.moneysmart.sg/home-loans...o-we-avoid-it/
    The three laws of Kelonguni:

    Where there is kelong, there is guni.
    No kelong no guni.
    More kelong = more guni.

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    Quote Originally Posted by htng View Post
    If the crisis ever come, I think it will be worst than before because fundamentally we have not recovered from the previous crash. There is so much money in the market and QE. I think the rally is not sustainable.

    May I know under what circumstances will bank do a margin call on my property? When the valuation price drop by more than 20% of my loan or they will not as long as I continue to pay my mortgage?
    Your loan is it an investment property or self-stay property.

    I believe Bank give different weight age.

  19. #19
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    Quote Originally Posted by Arcachon View Post
    Your loan is it an investment property or self-stay property.

    I believe Bank give different weight age.
    Self stay but this is not the only property. Maybe 1-2 more property but fully paid. Depending on the market, sometimes the value can go down by 20-30% like Asian Finance Crisis and Sub Prime Crisis etc.....

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