Understanding Call Loans and Mortgage Risks

Call Loan refers to a situation where a bank demands the immediate repayment of a mortgage loan. According to the mortgage contract, the bank, as the lender, has the right to request the borrower to repay the loan in advance at any time. If the borrower fails to repay the loan on time, the bank has the right to initiate the Call Loan process and may reclaim the property or auction it to repay the outstanding debt.

What Situations Trigger a Call Loan?

Banks will initiate the Call Loan process under the following circumstances:

Unauthorized Rental: The borrower rents out the property or uses it for other purposes without the bank's consent.
Second Mortgage: The borrower applies for a second mortgage with another financial institution without the bank's approval.
Persistent Default on Repayments: The borrower fails to repay the loan on time, especially when the default exceeds six months or more.
Illegal Activities: The use of the property or loan involves illegal activities, posing a threat to the bank's interests.
Other Debt Issues: The borrower fails to repay other debts on time, affecting their repayment ability.

Will Negative Equity Trigger a Call Loan?

In Hong Kong, due to recent fluctuations in property prices, some homeowners may find themselves in a situation of negative equity (where the property value is lower than the outstanding loan balance). Although negative equity increases the risk for banks, it is not a direct reason for initiating a Call Loan. A Call Loan is primarily triggered when a borrower fails to repay the loan on time or violates the mortgage contract. Even if a borrower is in a negative equity situation, as long as they repay the loan on time, banks generally will not demand early repayment.

The Role of Mortgage Insurance and High Loan-to-Value Ratio Loans

Many mortgage loans in Hong Kong utilize high loan-to-value ratios and mortgage insurance to reduce bank risks, especially in the event of a decline in property prices. If negative equity occurs, banks can still mitigate risks and reduce losses through insurance. Therefore, even if property values drop, the bank's risk is alleviated, and it typically does not trigger a Call Loan due to negative equity.

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