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Old 30-08-2011, 01:17 PM
EnRoute EnRoute is offline
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Default On Margin Call for Property

Under what circumstances would banks issue margin calls?

X buys a Singapore property valued at 1M. He has a good credit rating and takes a loan to valuation of 80% (X pays 0.2M and borrows 0.8M). He never misses a payment and so far has paid back 0.05M, now owing the bank 0.75M. Unfortunately, property prices drop , such that his property is now worth 0.7M.

Question 1: Would X get a margin call from the bank? Note that he is still able to keep up with the monthly payments.

Question 2: Are all banks equally ruthless in issuing margin calls.

Question 3: If X had taken a loan to valuation of 60% on the 1M property, and paid back 0.05M so far, he now owes the bank 0.55M. The value of the property dropped from 1M to 0.7M (i.e. the LTV is now 0.55M/0.7M=78%, greater than the original 60%). Will X get a margin call?

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