Ho is earning HK$30,000 per month and has a saving of total HK$900,000. He is now thinking
Question:
Ho is earning HK$30,000 per month and has a saving of total HK$900,000. He is now thinking of getting his first home. There are two choices available to him: 1) to buy a flat at HK$4.4M or 2) to rent a flat at HK$12,000 per month.
He has done some researches on the corresponding benefits and costs. Below is the information.
Renter's insurance 3000
Maintenance 4000
Security deposit 24000
Tax saving 20% of the interest payment
Property tax rate 1% of price of home
Closing costs (exclude stamp duty) 60000
Home insurance 5000
Stamp duty (refer to the lecture note)
He expects that the value of the property will increase by 1% annually and he can get a rate of return of 4% on his investment.
He has also searched for some mortgage plans and plans to take a 25 years loans.
Bank A
Bank B
Prime rate
5%
5.50%
Spread
2.5%
3.2%
Cash reimbursement
1%
1%
Interest penalty
1% of the mortgage loan for within the 1st year
1% of the mortgage loan for within the 1st 2 years
Questions:
a) What is the minimum down payment needed?
b) If he decides to live in his home for more than 5 years and both plans offer him the same loan amount, which mortgage plan is a better choice?
c) Work out an amortization table for the corresponding mortgage plan for the first 12 months.
d) Work out a cost analysis for the “buy or rent” decision.
International Economics Theory and Policy
ISBN: 978-0273754206
9th Edition
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz