What if your property drops in value? What can the banks do?

[jamontoast]

As per the subject...
and hoping this never actually happens to many people or the decline is not much...

What can the banks do in terms of your loans?
What can we do to protect ourselves?

 

[buzzlightyear]

What can the banks do in terms of your loans?

The standard T&C's of a bank loan allow the bank to recall the loan at anytime. In practice, I have never heard of a residential loan being called in by the bank, even in the last recession where the borrower was fulfilling their obligations.

What can we do to protect ourselves?

Pay your loan payments as and when they fall due.

 

[devo76]

My expieriance is limited but i feel the same way. If you are paying everything on time and dont give the bank reason to believe that you may fall behind and be unable to catch up. Then i see no reason for the bank to rock the boat. Why would the bank dive in and turn a paper loss into a real one. They would much prefer you to continue paying interest until the property gains in value again.But if you fall behind then that may change things.

 

[wylie]

I asked my loan broker a few days ago whether he had ever heard of a property loan being "margin called".

He told me that if the repayments are being met with no defaults, the banks cannot call in the loan.

Curious to see what the other brokers' comments on this would be.

 

[banahers]

I asked my loan broker a few days ago whether he had ever heard of a property loan being "margin called".

He told me that if the repayments are being met with no defaults, the banks cannot call in the loan.

Curious to see what the other brokers' comments on this would be.

Wrong. Banks can call in a loan at anytime regardless of repayment history. Read your credit contract.

 

[ger]

I had several properties back in
the late '80s early '90s which
fell below the value that was
still owing to the bank.
I kept up with payments as normal
and never heard anything from the bank

 

[marg4000]

Many years ago in the 1980s the term "negative equity" first rose its ugly head - well, first time I had heard it.

Many people owed more than their houses were worth. I do know of people forced to sell because they could not make their payments. I can't remember hearing of any action being taken by banks so long as payments were being made on time.
Marg

 

[Steve Cockrane]

Wylie,

Technically your broker isn't correct, as Buzzlightyear and banahers said the T & C's of most mortgages allow a lender to call in a loan regardless of whether or not a act of default has occurred.

But this rarely if ever occurs, it's just a standard term to protect their interests.

Another standard T & C a lot of loan contracts have is the right of the lender to request a valuation at any time, often at the borrower's cost. I've only seen this come close to happening once, going back a few years the state government was trying to establish a toxic waste dump near suburban Werribee. Some lenders dropped LVR's for new loans to 70% and one lender made preliminary noises about getting valuations done on properties in the area already on it's books.

But as the other posters have said banks would be unlikely to act if payments are being made on time.

The lesson is to always read your contract and understand it's implications before you sign. Knowing what can happen can help you manage your risks more intelligently.

Cheers

Steve

PS Another common T&C is that the lender has to approve a lease on the security property prior to it's execution. Something I've never know anyone to comply with!

 

[Piston Broke]

I also posted before, that since the 80's I have not heard of one person being foreclosed, that had made all repayments on time.
I even know of some in the 80's who arranged to make only the interest and no principle for a few mths.

Not all loans have the same T&C's.
You will find that LOC type loans can sometimes be recalled with XX notice.
Most P&I loans from a few years ago (in a few mins i'm gonna go look for a recent contract) can only be "recalled" in the event of a default as far as I know, because I had some.

 

[Rolf Latham]

Hiya

it depends

There is the legal position, and that is if the bank deems u to be in default, through THEIR valuation or your poor management of repayments, they can usually ask for the loan to be repaid on demand.


There is already enough said as to what to do to make sure that doesnt

Things to remember

1. banks make money on interest repayment, not principal reductions
2. A lender would prefer you to pay interest over the long term rather than pay the principal off right now
3.If the bank ask for the loan back, they dont think u can pay the interest

ta
rolf

 

[Jimmyjamjars]

You would be surprised at just what banks will ask for in differing times. We took out a loan on our first home on the Gold Coast in 1990, it was a rough house in a good street. In the contract, the bank stipulated that we renovate the dwelling within a 6 month timeframe. Twas ANZ. We did and they never ever checked on it but it was in there in black and white. I gotta say, we have had the majority of our loans with ANZ ever since and haven't had trouble with them once. So far !!!
JIM

 

[Piston Broke]

from my T&C from Westpac abr :

you are in default if:

a. you do not pay any amount due under this loan or any other loan with us.
b. you do something you agree not to do, or not do something you agree to do.
c. you give misleading information
d. you act fraudulently
e. you become insolvent
f. you no longer have the security (asset)

Seem fair to me. Nothing about LVR, just make the payments, and she'll be right.

Suncorp LOC is pretty much the same, the only difference being "if you die or become incapable of managing you affairs".

 

[poppy]

I had a loan with ING I closed about 3 years ago, that specifically had a "margin call" clause in it. It said (can't remember the exact wording) that if the bank decided the home had dropped in value, it would require that within a certain time period (couple of weeks?), I would have to pay down the loan back to the previous LVR, or I would have to refinance or sell the house.

Edit: I remember they also gave the option to pay extra LMI.

 

[Perp]

The standard T&C's of a bank loan allow the bank to recall the loan at anytime.

Banks can call in a loan at anytime regardless of repayment history.

What they said!

The main protection we have is that banks don't want the bad publicity associated with foreclosing; they really have rather strong incentives to avoid it. But they sure can do it if they want to.

When my solicitor screwed up conveyancing (advised searches were clear when they weren't ), and post-settlement a major defect was revealed, rendering my property uninhabitable , I - naively - went to the lender asking for more finance to rectify the problem. The bank not only declined my request for funds to rectify, but made verbal representations via my broker that my property wasn't worth what they'd valued it at 2 months earlier (when they didn't know about the problem), and thus they were considering calling in my loan. I don't know how serious it was, but I just tried to stay off their radar, and refinanced as soon as I possibly could.

I wouldn't want to be betting that they'll never call in residential loans.

In particular, I wouldn't want to have a high LVR loan in any area with a plethora of new homes (Kellyville in Sydney, Redbank Plains or North Lakes in Brisbane, Taylors Lakes in Melbourne, to name just a few), or single-industry booming regional areas.