Question
Country A has the following countercyclical measures for all self-use residential properties: The maximum loan-to-value (LTV) ratio: 60% for property value below $8M; 50% for
Country A has the following countercyclical measures for all self-use residential properties:
The maximum loan-to-value (LTV) ratio: 60% for property value below $8M; 50% for property value above or equal to $8M.
The maximum debt-servicing ratio (DSR) is 55%, and its corresponding stressed-DSR is 65% (assuming an increase of the mortgage rate by 230 basis points). Richard, aged 32, intends to purchase a flat in Country A for self-use.
Richards monthly gross income is $35,000 and monthly net income is $29,500. Currently, he is required to pay $2,300 per month for the car loan and $3,000 per month to his retired parents for supporting their living expenses. After taking into account of all his saving and borrowing from his retired parents, Richard could afford to pay $1.8 million as down payment. The mortgage plan provided by Lion Bank is H+1.6%, cap at P-3%, repayable in 25 years. The current 1-month HIBOR and Prime rate are 1.12% and 5.06%, respectively.
Richard is further advised by the real estate agent that Mortgage Insurance Plan (MIP) in Country A allows the mortgagor borrow up-to 90% of the home value, subject to meeting the requirements of DSR and stressed-DSR (excluding mortgage insurance premiums). Participating in MIP incurs premium expense. The mortgagor is liable for paying a one-off premium expense equivalent to 4% of the mortgage amount, or an annual premium expense equivalent to 1.2% of the mortgage balance. Richard plans to borrow as much as possible from the Lion Bank because he does not want to use his retired parents limited saving as his down payment. Required
(a) According to the mortgage plan provided by the Lion Bank, calculate Richards maximum mortgage amount which fulfills the requirements of LTV ratio, DSR and stressed-DSR. Show all working.
(b) Based on your answer in (a), calculate the monthly mortgage payment and the total amount of interest to be incurred in the mortgage.
(c) Advise Richard any THREE benefits and TWO drawbacks of joining the MIP. Your answer should be based on Richards situation and supported with quantitative data or analysis, if available. Show all workings. (word limit: 300 including calculation)
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