Terence, a credit approval manager in ABZ Bank, is assessing mortgage loan application submitted by Tommy who just bought a new flat in Kai Tak. The following information is provided by the applicant:

Monthly gross income	$120,000
Annual property taxes	$4,000
Annual homeowners insurance	$800
Monthly repayment on the major credit card (paid by bank autopay)	$1,500
Purchase price of flat	$8,000,000
Market value of flat	$8,300,000
Mortgage interest rate	HIBOR + 1% (Capped at P-2%)
Down payment	30%
Loan repayment period	25 years
1-month HIBOR	4%
Prime rate (P)	7.5%

1. (a) Calculate the (1) monthly mortgage payment and (2) total interest expenses of the mortgage paid by Tommy, using mortgage payment factors table. (5 marks)

2. (b) Calculate Gross Debt Service ratio (GDS) and Total Debt Service Ratio (TDS) of

Tommy. (4 marks)

(c) Identify and explain briefly TWO factors (other than those mentioned above) that affect approval decision of the mortgage application. (4 marks)

(d) From viewpoint of ABZ Bank,

1. (i) explain the trade-off of imposing interest rate cap for mortgage loan. (5 marks)

2. (ii) explain TWO reasons why mortgage loan is more preferred than credit card loans. (4 marks)

3. (iii) explain the trade-off for expanding mortgage refinancing. (4 marks)

4. (iv) identify and explain briefly TWO common weaknesses of ratio analysis and Altman-Z score in assessing credit risk of commercial & industrial loans. (4 marks)

Appendix: Mortgage payment factors table [Principal and interest factors per $1,000 of loan amount] Term Rate 30 Years 25 Years 20 Years 15 Years $ 5.37 5.68 6.00 $ 5.85 6.14 $ 6.60 6.88 6.44 7.16 6.32 7.45 5.0% 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 7.75 8.06 6.65 6.99 7.34 7.69 6.67 7.06 7.39 7.72 8.05 8.39 $7.91 8.17 8.43 8.71 8.98 9.27 9.56 9.85 10.14 8.36 8.68 9.00 8.05