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Paul bought an apartment in West Kowloon two years ago with a $50 million adjustable rate mortgage (ARM) loan from a bank for a period of 20 years. "HIBOR + 2 percent" was the mortgage interest rate. Paul was only needed to make monthly "interest-only payments" for the first two years. The HIBOR has not changed since the loan was made and has remained at 1.5 percent for the past two years. Payments will be adjusted after two years to fully amortize the loan at maturity.

Question:

1(a) Suggest two reasons for Pauls choice of using an ARM instead of a fixed-rate mortgage.

1(b) Briefly explain why banks may prefer a HIBOR mortgage to a fixed-rate mortgage.