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Old 28.06.2011, 10:16
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Re: Swiss Mortgage Margin Calls

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A margin call on a mortgage has nothing to do with an interest rate rise*. The banks want to maintain a specific loan to valuation (LTV) on a property - if you put down 20% deposit, then the LTV is 80%.
Interest rate is used to value properties of all sorts in what is known as the Discounted Cash Flow model which incidently is also used to value various other assets with regular cash flow. So the point here is that interest rate can be used to predict how much of a drop in prices it would be if the interest rate rises or falls. You are right though as the prediction is just a prediction at the end of the day and the price might not necessarily move because of rising inflation or might fall more than is predicted because of market conditions. History doesn't repeat itself in the exact same way but one thing is for sure if the house values are perceived to be lower by an amount that would change the LTV significantly then the banks will act to meet captial requirements...
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