Hello,
I have a theoretical question which may or may not be stupid!
This is an extreme example, but what would happen?
Say I owe $200K on a house which is currently worth $250K – ie $50K worth of equity, which I then use as a deposit to purchase an IP.
However, suddenly the value of my original house plummets from $250k to $150K… I now have negative equity. However, I'm still able to meet mortgage repayments on both places comfortably and am never late or behind.
Does the fact that my original house is now worth less than what it was valued at mean the bank can call in the loan they gave me for the IP, or am I fine as long as I keep meeting the mortgage repayments on time?
Cheers.
Generally, you may be fine – depending upon the type of loan that you have eg fixed rate or IO you may have need to refinance at the end of 5 years or so. You run the risk at that point of the bank revaluing the property, realising that you have negative equity and requiring that you either top-up your equity or decline new finance leaving you in the lurch to find a new financier/force a sale.
Will the bank loan out 100% is an important fact mine is only lending to 80% LVR on an equity loan.
Dodo
I have wondered about this situation before also. But unless you are refinancing is the bank going to be aware your property has dropped in value? Would they be doing a valuation unless you are refinancing?A really good question……
In theory, if you have a 'traditional style' bank loan, this would not normally be a problem – unless you request the bank revalues your property – usually that would only be if you are planning on borrowing more against it, cross securing it with another property, or if you have a business facility or revolving type of facility (such as a line of credit – which can be 'reviewed' every now and then.
I have seen some bad outcomes when property does come in lower thats for sure. Really though, in 99% of cases, for most residential property you will be fine. I would suggest if you were considering getting a property revalued by an exisitng lender/bank, do your homework first…..and if in any doubt…..dont.All the best.
dodo_lurker wrote:However, suddenly the value of my original house plummets from $250k to $150K… I now have negative equity.That's one of the good things about property. There is no "suddenly" – it is a very slow moving beast. Lots of ppl sit on negative equity without having their loans called in. What is a bank going to do with a house? It just wants your interest payments – which if you are paying – they will probably leave you alone to do just that. Now maybe if you had borrowings over $1M with the same bank or applied for more loans as the others have said, it might be a different story.
dodo_lurker wrote:Does the fact that my original house is now worth less than what it was valued at mean the bank can call in the loanIf you read your mortgage docs you will see they can call in any loan you have for any reason they like whether it is in good stead or not. The borrower really is at the mercy of the lender.
Cheers.
And this has already happened on the UK and the USA.
Richard Taylor | Australia's leading private lender
propertunity wrote:Now maybe if you had borrowings over $1M with the same bank or applied for more loans as the others have said, it might be a different story.As the old saying goes, if you owe the bank $1M and can't pay – you've got a problem. If you owe the bank $10M and can't pay – then the bank's got a problem. I've seen it plenty of times where the small fish (who have adequate asset coverage/equity) get foreclosed on whilst those where the bank stands to lose a whole lot more remain unscathed.
Yesterday I heard of a person that has been asking to reduce their LVRs as they were deemed a higher risk now. ie like a margin call. Not sure if it is true as not first hand info,
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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