Risks associated with housing company loans

What risks are associated with housing company loans?

The most important factor to note is the impact of a housing company loan on your own total debt burden. The effect of an interest rate rise is emphasised in situations where the borrower has taken out too large a housing loan relative to his or her available income, and both the borrower’s own housing loan and the housing company loan are linked to market rates or to the bank’s own prime rate. In that case, the increase in interest expenses is seen both in the borrower’s own housing loan interest and in higher housing service charges.

What if some housing company shareholders are unable to pay their share of a housing company loan?

The limited company structure of the housing company affords the shareholders protection in the event that some of the shareholders are unable to pay their share of a housing company loan. In such a situation, the housing company may assume control of the apartments in question.

Control of an apartment may be assumed for at most three years at a time, subject to a decision of the shareholders’ meeting. The housing company may rent out the apartment and use the proceeds to pay the outstanding housing service charge. Even if the company takes control of the apartment, the shareholder retains ownership.

Sometimes the shareholder’s payment difficulties are settled by realising collateral, i.e. by selling the apartment of the insolvent owner. If the apartment cannot be successfully realised or the management of the loan cannot be renegotiated with the bank, the defaulting owner’s share of the loan will burden the rest of the shareholders.