Mr. and Mrs. Ho, a couple in their early 30s, approach you for real estate investment and financial advice. Both are working in the private sector. They are currently staying in a HDB 4-room flat purchased 5 years ago for $300,000 and are thinking of upgrading to a private apartment in an East Coast development called Baywatch Towers. The developer of Baywatch Towers has a special package for the Hos. If the couple takes up the loan offered by their affiliated bank, Baywatch Bank of Singapore (BBS), the developer will absorb all associated fees including stamp duty, legal fees and other sale expenses. The terms of the BBS loan are as follows:

Apartment Price	$600,000
Cash Down payment	$60,000
CPF Down payment	$60,000
Period of Loan	25 years
Interest Rate (1st year fixed)	2.5%
Interest Rate (2nd year fixed)	2.8%
Interest Rate (3rd year onwards)	Adjustable

The Hos are thinking of borrowing for 10 years only. The apartment has been given TOP status and is ready for moving in.

You are able to ascertain the following information.

The Hos are currently paying for their HDB flat. When they bought it 5 years ago, they took out a 30-year mortgage for $240,000. The interest rate charged on the loan was 2.6% p.a. on a monthly rest basis. The CPF Ordinary Account withdrawals to purchase and finance the house were:

Mr. Ho: $40,000 in lump sum

$700 towards debt service each month for the past 5 years

Mrs. Ho: $20,000 in lump sum

$260.82 towards debt service each month for the past 5 years

The valuation on the HDB flat is currently $350,000.

Mr. Ho is 31 years old and his current income is $4,300 per month. His wife is also 31 years old and earns $3,500 per month.

Assume that the employees CPF contribution rate is 20% of the monthly salary while the employers CPF contribution is 17% of the monthly salary. (Assume that the salary ceiling is $6,000)

The Hos have combined savings of $65,000 earning 0.25% p.a. in their joint ICUC Bank Savings Account.

CPF paid an interest rate of 2.5% p.a., monthly compounded, on Ordinary Account contributions over the past 5 years and this rate is not likely to change in the foreseeable future.

The legal fees for buyers of private property are about 1.0% of the purchase price. Stamp duty payment is subject to the usual legal schedule.

The real estate agency charges the Hos 1% of the sale price for covering selling charges of the HDB unit.

The loan quantum stipulated by the MAS is 80% of the purchase price or valuation, whichever is lower.

The Hos have a combined current balance of $60,000 in their CPF Ordinary Accounts.

Once the promotional rates on the BBS loan have passed for the purchase of the private unit, your forecast of the interest rate in Year 3 is 4.5%, Year 4 is 5% and Year 5 and beyond is 5.5%.

Assume monthly compounding.

What is the existing unpaid mortgage balance on the HDB unit?

How much must the couple refund to the CPF Board on the sale of their HDB flat? What will be the combined balance in the couples CPF Ordinary Accounts after the refund is made?

What must the minimum selling price of their HDB flat be if the Hos are to have non-negative net cash proceeds from the sale? (Stamp duty is not payable for the HDB flat but selling expenses would be incurred.) Are they likely to achieve this?

What is the minimum cash outlay required for the purchase of the Baywatch Towers private apartment unit at the asking price based on prevailing government regulations? Can the couple afford the purchase? Assume that the net cash proceeds from the sale of the HDB flat are zero.

The Hos are considering paying the first 10% downpayment by cash and the remaining 10% downpayment using their CPF monies. They also want to use up all their CPF monies to pay for the new home to reduce the loan amount. Determine how much the Hos need to borrow from BBS to buy the private unit and their debt service for the next five years assuming a 10-year CPM (Constant Payment Mortgage).

Compute the first years PIR or payment to income ratio, i.e. the ratio of the monthly debt service to gross income for the Hos. What can you conclude if BBS imposes a PIR of 0.4 as part of its loan underwriting process?

Mr. and Mrs. Ho, a couple in their early 30s, approach you for real estate investment and financial advice. Both are working in the private sector. They are currently staying in a HDB 4-room flat purchased 5 years ago for $300,000 and are thinking of upgrading to a private apartment in an East Coast development called Baywatch Towers. The developer of Baywatch Towers has a special package for the Hos. If the couple takes up the loan offered by their affiliated bank, Baywatch Bank of Singapore (BBS), the developer will absorb all associated fees including stamp duty, legal fees and other sale expenses. The terms of the BBS loan are as follows:

Apartment Price	$600,000
Cash Down payment	$60,000
CPF Down payment	$60,000
Period of Loan	25 years
Interest Rate (1st year fixed)	2.5%
Interest Rate (2nd year fixed)	2.8%
Interest Rate (3rd year onwards)	Adjustable

The Hos are thinking of borrowing for 10 years only. The apartment has been given TOP status and is ready for moving in.

You are able to ascertain the following information.

The Hos are currently paying for their HDB flat. When they bought it 5 years ago, they took out a 30-year mortgage for $240,000. The interest rate charged on the loan was 2.6% p.a. on a monthly rest basis. The CPF Ordinary Account withdrawals to purchase and finance the house were:

Mr. Ho: $40,000 in lump sum

$700 towards debt service each month for the past 5 years

Mrs. Ho: $20,000 in lump sum

$260.82 towards debt service each month for the past 5 years

The valuation on the HDB flat is currently $350,000.

Mr. Ho is 31 years old and his current income is $4,300 per month. His wife is also 31 years old and earns $3,500 per month.

Assume that the employees CPF contribution rate is 20% of the monthly salary while the employers CPF contribution is 17% of the monthly salary. (Assume that the salary ceiling is $6,000)

The Hos have combined savings of $65,000 earning 0.25% p.a. in their joint ICUC Bank Savings Account.

CPF paid an interest rate of 2.5% p.a., monthly compounded, on Ordinary Account contributions over the past 5 years and this rate is not likely to change in the foreseeable future.

The legal fees for buyers of private property are about 1.0% of the purchase price. Stamp duty payment is subject to the usual legal schedule.

The real estate agency charges the Hos 1% of the sale price for covering selling charges of the HDB unit.

The loan quantum stipulated by the MAS is 80% of the purchase price or valuation, whichever is lower.

The Hos have a combined current balance of $60,000 in their CPF Ordinary Accounts.

Once the promotional rates on the BBS loan have passed for the purchase of the private unit, your forecast of the interest rate in Year 3 is 4.5%, Year 4 is 5% and Year 5 and beyond is 5.5%.

Assume monthly compounding.

What is the existing unpaid mortgage balance on the HDB unit?

How much must the couple refund to the CPF Board on the sale of their HDB flat? What will be the combined balance in the couples CPF Ordinary Accounts after the refund is made?

What must the minimum selling price of their HDB flat be if the Hos are to have non-negative net cash proceeds from the sale? (Stamp duty is not payable for the HDB flat but selling expenses would be incurred.) Are they likely to achieve this?

What is the minimum cash outlay required for the purchase of the Baywatch Towers private apartment unit at the asking price based on prevailing government regulations? Can the couple afford the purchase? Assume that the net cash proceeds from the sale of the HDB flat are zero.

The Hos are considering paying the first 10% downpayment by cash and the remaining 10% downpayment using their CPF monies. They also want to use up all their CPF monies to pay for the new home to reduce the loan amount. Determine how much the Hos need to borrow from BBS to buy the private unit and their debt service for the next five years assuming a 10-year CPM (Constant Payment Mortgage).

Compute the first years PIR or payment to income ratio, i.e. the ratio of the monthly debt service to gross income for the Hos. What can you conclude if BBS imposes a PIR of 0.4 as part of its loan underwriting process?

The Hos now approach their current bank to determine if they can obtain more favorable financing terms. ICUC came up with a special deal for them where the legal fees associated with the purchase at Baywatch Towers will be absorbed by the bank. However, the Hos will need to pay the stamp duty themselves. ICUC will charge 0.8% in year 1, 3.8% in year 2 and 4.8% in years 3 and 4 and 5.5% thereafter. How much must the Hos borrow now? Determine their payment schedule for the first 5 years of the new 10-year CPM loan.

Suppose BBS is very eager to do business with the Hos and is willing to waive the loan underwriting requirement. Assume also that the Hos are not overly concerned with the high PIR as their parents have promised to back them financially if necessary. Which loan would you recommend to the Hos and why? Without performing any computations, advise the Hos whether they should prepay the loan before the 10-year maturity period is up. State clearly the basis for your advice.