What happens to borrowed equity if property prices crash

Hi,

I'm a newbie who is contemplating to get started with property investment and have been an avid reader of this forum for few months. Would like to hear from experts on the below scenario

Say, if I take $50K equity from existing PPOR and then prices crash by 10%-15% a year later, will the bank come bank to me asking to repay $50K borrowed? Or do I need to pay ($50K + depreciated value) ?

Apologies in advance if the question looks too stupid/dumb.
 
I learned from see_change the other day that "margin calls" are possible for CIP loans, but I've never heard about it happening in residential. If I'm wrong I'd love to hear about it as I've wondered the same myself.
 
I have lived through times when "negative equity" was an issue, i.e. the owner owed more than the property was worth.

So long as payments continued to be made there were no problems with the banks. Of course, things may be different now or in the future.
Marg
 
I would think it's less likely because it's such an illiquid asset. It's not like shares where you can just liquidate on a dime. Also the potential destabilizing nature it would have on the whole economy and therefore the bank's own stability.
 
Negative equity isn't ideal, but it's hardly the massive scary monster some people make it out to.

Anyone who has ever financed 100% of a new car has experienced negative equity, for example.

Provided your cashflow is reliable and you make payments as required you'll be fine.
 
Yes can be a problem in commercial, especially if your loan has annual reviews. Residential usually not problematic but the bank has the ultimate discretion. Obviously it's not in their interest to bankrupt the whole country and realise losses.
 
So if there was a black swan type event, would it be advisable to shift all that money to a different account just in case?

Not impossible, but they could ask to reduce LVRs...on IPs too...

I know once a bank asked us to repay the whole LOC... It wasn't a nice feeling, but mainly it was used for business (it was a small amount too!).
So they can do anything they like, right?
 
Not impossible, but they could ask to reduce LVRs...on IPs too...

I know once a bank asked us to repay the whole LOC... It wasn't a nice feeling, but mainly it was used for business (it was a small amount too!).
So they can do anything they like, right?

Do you think they targeted you because you told them it was for business?
 
Not impossible, but they could ask to reduce LVRs...on IPs too...

I know once a bank asked us to repay the whole LOC... It wasn't a nice feeling, but mainly it was used for business (it was a small amount too!).
So they can do anything they like, right?

I remember going to a workshop in the late 80's or early 90's where a banker said the only thing keeping a lot of small businesses going was that they had equity in residential property which had been mortgaged to the bank for carry on capital
 
Bankwest shafted a large percentage of their hotel owning commercial customers a few years ago this way.

Order a valuation on the security with instructions it be a fire sale valuation.
Valuations came back far below previous valuations
Margin calls placed on those whose LVR is now out of terms
Many unable to secure funding as WBC also commenced re-valuing hotel portfolio (industry valuations pushed down)
Bankwest claim security

It's unlikely to happen in residential property, but it can be a good way to clear out some problem customers or rebalance a loan portfolio, particularly if you have a clawback provision with Bank of Scotland refunding up to $200M in bad loans :rolleyes:
 
Bankwest shafted a large percentage of their hotel owning commercial customers a few years ago this way.

Order a valuation on the security with instructions it be a fire sale valuation.
Valuations came back far below previous valuations
Margin calls placed on those whose LVR is now out of terms
Many unable to secure funding as WBC also commenced re-valuing hotel portfolio (industry valuations pushed down)
Bankwest claim security

It's unlikely to happen in residential property, but it can be a good way to clear out some problem customers or rebalance a loan portfolio, particularly if you have a clawback provision with Bank of Scotland refunding up to $200M in bad loans :rolleyes:

I assume "hotel" included serviced apartments too?
 
I assume "hotel" included serviced apartments too?

Not sure to be honest - most of what I saw concerned the pub type of hotel rather than the accommodation type.

They were a lender of interest as they did 70% LVR on pubs, then apparently decided they were over-represented in that industry.
 
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