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-   -   Swiss Mortgage Margin Calls (https://www.englishforum.ch/finance-banking-taxation/117743-swiss-mortgage-margin-calls.html)

Phil_MCR 27.06.2011 11:45

Swiss Mortgage Margin Calls
 
I heard that in the past, Swiss banks made margin calls on home-owners claiming that the value of the house was insufficient. Does anyone have experience of this and how much they re-valued the property downwards?

I was wondering if this was just a licence to cancel your mortgage. e.g. if you have a 10 year fixed rate mortgage and the IRs rise, then could the banks then say that the value of your property has decreased and so you need to pay down more of your mortgage.

At best, this reduces the benefit of having the low fixed rate and at worst leaves you in default if you can't find the additional capital?

fatmanfilms 27.06.2011 11:56

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by Phil_MCR (Post 1241805)
I heard that in the past, Swiss banks made margin calls on home-owners claiming that the value of the house was insufficient. Does anyone have experience of this and how much they re-valued the property downwards?

I was wondering if this was just a licence to cancel your mortgage. e.g. if you have a 10 year fixed rate mortgage and the IRs rise, then could the banks then say that the value of your property has decreased and so you need to pay down more of your mortgage.

At best, this reduces the benefit of having the low fixed rate and at worst leaves you in default if you can't find the additional capital?

Seems very odd, that the Value should be effected by a high interest rate, which would indicate highj inflation.
Swiss do depreciate buildings 1% a year which could produce a shortfall over time. Land prices did fall in the 90's so it's possible

dodgyken 27.06.2011 12:11

Re: Swiss Mortgage Margin Calls
 
Not experienced it - and you have to remember it is unlikely. HOWEVER if there was a property crash in Switzerland the banks have the option to make a margin call against you.

It is a way of them ensuring you know that if such an event happens they have recourse to MORE than just the house. :eek:

Phil_MCR 27.06.2011 12:22

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by dodgyken (Post 1241847)
Not experienced it - and you have to remember it is unlikely. HOWEVER if there was a property crash in Switzerland the banks have the option to make a margin call against you.

Well, I heard it happened before in the 90s, and I think if it was going to happen it would be when IRs rise again in the next few years. IRs have been low for a while which may have led to some people getting overstretched (a Swiss-subprime crisis in the making?).

http://www.global-rates.com/images/c...chart-6-66.jpg

The_Love_Doctor 27.06.2011 12:38

Re: Swiss Mortgage Margin Calls
 
Haven't experienced this first hand, but I'd say the bank would make a margin call based on the interest rate rise, how they calculate it I'm not quite sure but it would be something like the yearly rental value for every full percentage move upwards.

Quote:

Originally Posted by fatmanfilms (Post 1241821)
Seems very odd, that the Value should be effected by a high interest rate, which would indicate highj inflation.

It's slightly counter intuitive however it makes perfect financial sense. raising the interest rate means that the SNB is trying to tackle inflation, when it raises interest rates inflation should stop or start to reverse which includes the prices of houses. The reason for this is actually a fundamental one as the risk free rate goes up the riskier assets have to go down in value to compensate for this.

meloncollie 27.06.2011 17:31

Re: Swiss Mortgage Margin Calls
 
I believe this happened in 1990 or so (a bit before my time anyway). When the property prices fell sharply, some banks then called in the difference to cover their exposure.

A couple of my friends were affected, needing to come up with some serious cash sharpish to top up the deposit payment.

A good reason not to stretch too far in today's bubble market. Or, if taking out a maximum loan makes sense at the moment, it might be a good idea to keep some of your investments fairly liquid - or at least keep those assets with the bank holding your mortgage so you are in a better position to negotiate. ;)

But in any event, check the small print on your loan agreement. There should be something discussing this possibility.

miniMia 28.06.2011 01:20

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by Phil_MCR (Post 1241862)
Well, I heard it happened before in the 90s, and I think if it was going to happen it would be when IRs rise again in the next few years. IRs have been low for a while which may have led to some people getting overstretched (a Swiss-subprime crisis in the making?).

It shouldn't as usually banks use 5% interest rates to see how much you can afford as a mortgage, not the current rate.

Phil_MCR 28.06.2011 07:15

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by meloncollie (Post 1242314)
I believe this happened in 1990 or so (a bit before my time anyway). When the property prices fell sharply, some banks then called in the difference to cover their exposure.

A couple of my friends were affected, needing to come up with some serious cash sharpish to top up the deposit payment.

A good reason not to stretch too far in today's bubble market. Or, if taking out a maximum loan makes sense at the moment, it might be a good idea to keep some of your investments fairly liquid - or at least keep those assets with the bank holding your mortgage so you are in a better position to negotiate. ;)

But in any event, check the small print on your loan agreement. There should be something discussing this possibility.

do you have an idea how much they had to come up with? just trying to get an idea as to how much to provision for...

dodgyken 28.06.2011 09:32

Re: Swiss Mortgage Margin Calls
 
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%.

Should property prices fall - for whatever reason - then the ratio of the loan to the property value will increase - and they MIGHT make a margin call to cover the difference and return to the 80%.

HOWEVER here are some things to remember:
1) The margin calls in the 90s (20 years ago) were due to generous lending at 90-95%LTV. Banks no longer do that.

2) Property appreciates at around the rate of inflation - the longer you own the property the greater the reserve should property prices fall

3) If you pay off capital (IE the 2nd mortgage) either in savings or upfront payment then you are reducing your LTV - if the bank makes a margin call you should have a good chunk of it already covered.

4) If property prices do fall the bank aren't obligated to make a margin call. They may instead insist that you are re-evaluated for mortgage affordability, they may also insist that you repay capital over the next 3-5-10 years - rather than place that in savings.

We questioned our mortgage guy about this paragraph - his reply "We put that in there because the bank got burned badly when prices collapsed in the 90s. I don't think we have ever had to use it ever since"

The_Love_Doctor 28.06.2011 10:16

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by dodgyken (Post 1242923)
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... :msnnerd:

dino 28.06.2011 11:05

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by dodgyken (Post 1242923)
We questioned our mortgage guy about this paragraph - his reply "We put that in there because the bank got burned badly when prices collapsed in the 90s. I don't think we have ever had to use it ever since"

famous last words eh..?

if it's in the contract, it WILL be used.

Phil_MCR 28.06.2011 13:35

Re: Swiss Mortgage Margin Calls
 
well, the thing is, it seems it is the banks who decides the value of the house. so maybe they will say "in our opinion, it's now worth 200k less, now go out and give me 40k".

the reason i mention interest rates is that higher IRs could lead to price falls, but also, it would be in the bank's interest to make you pay down loans when IR rates are higher than your fix so that you don't benefit from the fix.

i also asked about the clause, they mentioned that they had used it for foreign properties (mainly due to increase in CHF).

CH_Me 28.06.2011 13:57

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by Phil_MCR (Post 1243345)
well, the thing is, it seems it is the banks who decides the value of the house. so maybe they will say "in our opinion, it's now worth 200k less, now go out and give me 40k".

the reason i mention interest rates is that higher IRs could lead to price falls, but also, it would be in the bank's interest to make you pay down loans when IR rates are higher than your fix so that you don't benefit from the fix.

i also asked about the clause, they mentioned that they had used it for foreign properties (mainly due to increase in CHF).

I know of people that they have used the clause for within the last few years and they were asked to find the money fast.

Phil_MCR 28.06.2011 14:01

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by MarieZug (Post 1243374)
I know of people that they have used the clause for within the last few years and they were asked to find the money fast.

did they say what would happen if they didn't find the money? also, what was the trigger for making the call?

CH_Me 28.06.2011 14:08

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by Phil_MCR (Post 1243382)
did they say what would happen if they didn't find the money? also, what was the trigger for making the call?

They were asked to pay by a certain deadline. Failing that, they were in breach of their agreement, so I assume their place would be put into receivership. The reason was a drop in value and the owner had recently lost their job.

Phil_MCR 28.06.2011 14:30

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by MarieZug (Post 1243394)
They were asked to pay by a certain deadline. Failing that, they were in breach of their agreement, so I assume their place would be put into receivership. The reason was a drop in value and the owner had recently lost their job.

thanks. do you know why there was a drop in value, or how they measured that?

if the person lost their job, and they could get RAV, then i wonder if it is a bit unreasonable to ask for them to come up with the money quick if they will still get 80% salary for a year...

dodgyken 28.06.2011 14:40

Re: Swiss Mortgage Margin Calls
 
Quote:

Originally Posted by Phil_MCR (Post 1243426)
thanks. do you know why there was a drop in value, or how they measured that?

Potentially - if the house was new then I could see that as being possible. New houses do seem to depreciate for the first few years!


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