If banks start charging Low Equity Premium should house prices fall?

[newbyvest85]

Hello!

In a hypothetical situation, where there is a negative price adjustment to the housing market, would a customer at a borderline LVR (say 78%) end up being over the 80% threshold, and start getting charged the Lower Equity Premium/Margin?

Does the answer to the above question matter depending on whether your home loan is fixed or on a floating rate?

If banks do charge LEP/LEM with house price falls, how often do they re-value our property (whether to our favour, or not)? Do we get advance warning that they are going to review our LVR?

Putting aside the question about Lower Equity Premium/Margin, but instead talking about Bank Special Rates (eligible to those with LVR below 80%), does again the house price drop cause a customer to lose the Special Rates when it comes to renewal?

Thanks so much for your wisdom!

[Bobsyouruncle]

No you wont get charged a premium, they will force you to reduce your loan amount or recall the loan. This happened in the GFC already.

[Dunning]

It would generally only be a factor when making a change to lending that the bank will look at the LVR, or if the bank has a reason to look into your finances(being behind on mortgages repayments, repeated over extension on credit cards, etc) As long as you are a good customer and making your repayments then they wont come looking for you if the house price drops. When you come to the end of a fixed term/ refinance, then the bank will reassess the LVR.

If you are paying a LEP then keep an eye on your mortgage balance for when you make it under 80% some banks are slow to remove the LEP.

[Bobsyouruncle]

As long as you are a good customer and making your repayments then they wont come looking for you if the house price drops.

Absolutely not what happened last time. If values drop the banks will recall loans and force reduced lending. No matter how good you may be.
I am assuming the OP is asking about a bit of a melt down rather than just a nominal drop. If it starts raining the banks will take all their umbrellas back!

[Dunning]

Yes, you are right, I should have put a disclaimer like "excluding another GFC type event, then they may review all loans". I was looking only at a drop in value changing the LVR from 78% to 81%.

[newbyvest85]

Thank you all.

I was referring more to a change of LVR from say 78% to 81%, as Dunning mentioned.

So if I am someone who has a LVR of 78%, it makes sense to fix for longer (say 2 years instead of 1)? That in 2 year's time, I may suddenly be charged a LEM/LEP, and also lose out on special rates?

[Chris W]

Absolutely not what happened last time. If values drop the banks will recall loans and force reduced lending. No matter how good you may be.
I am assuming the OP is asking about a bit of a melt down rather than just a nominal drop. If it starts raining the banks will take all their umbrellas back!

Given the threshold LVR of 80%, I'm assuming we're referring to a owner occupied house where the LVR exceeds 80% due to a fall in the market price.

Would the bank treat these types of borrowers differently and if so, how?

1) owner occupied house owner with no other investment properties

2) owner occupied house owner with other residential investment properties (where the LVR on the investment property portfolio remains under 60%) who is classified as a retail borrower

3) owner occupied house owner with other residential investment properties (where the LVR is above 60%) who is classified as a retail borrower

4) owner occupied house owner with other residential investment properties (where the LVR on the investment property portfolio remains under 60%) who is classified as business borrower

5) owner occupied house owner with other residential investment properties (where the LVR is above 60%) who is classified as a business borrower

As I understand it, banks will review borrowers which have large total amounts owing beyond a certain threshold. These are the borrowers which the bank monitors. A borrower who owes a large amount may be reviewed when some event occurs such as an when an investment property in the portfolio is sold, another investment property is purchased, a loan matures, etc. For large investment property owners who are classified as business or commercial borrowers, I understand they are subject to interest coverage ratios as well as LVR's which are reviewed on a regular basis (such as every 6 or 12 months). For those classified in categories 4 or 5 above, there may be a risk of a call for additional collateral by the bank.

For an owner occupier with no other properties, most are unlikely to be above the threshold unless they own in high socio-economic areas where house prices are high (such as Paratai Dr in Auckland) and they borrowed based on a 80% LVR.

Not sure how the banks would treat those in categories 2 & 3 above who have loans above the banks loan monitoring thresholds

[Soltek]

I had this exact conversation with my banking consultant last week. They will only look at your LVR if you are changing your lending or selling a property.
If you are just rolling over your existing borrowings then they don't recalculate your LVR. They may however look at your LVR, if you start pushing for a lower rate...