Question $2(22$ marks$)$

Stephen has been working in the current employer as an HR manager for more than $6$ years. His annual

gross income and annual take$-$home pay are $$480,000$ and $$440,000$ respectively. He doesn't have any

other outstanding debts and spends $$18,000$ monthly on living expenses.

Stephen is currently renting a one$-$bedroom apartment at Tai Po at a monthly rent of $$12,500.$ Last

month, he inherited $$3$ million from his grandfather. Thus, he is considering to use this amount of

money as down payment for buying his first apartment for self$-$use.

Below are the latest countercyclical measures for all self$-$use residential properties:

The loan to value ratio $($LTV$)$ is $80\%.$

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 in the stress test$).$

Stephen is now considering the following mortgage plan provided by Royal Bank:

Mortgage rate: $H+1\%,$ cap at $P-3\mathrm{.}1\%.$ Currently, the HIBOR is $2\mathrm{.}8\%$ and the Prime rate is $5\mathrm{.}375\%.$

Term of mortgage: Monthly payment and repayable in $30$ years.

$($a$)$ List any TWO advantages of buying an apartment.

$($b$)$ Determine the mortgage rate offered by the Royal Bank. Briefly explain your workings.

$($c$)$ Based on the latest countercyclical measures mentioned above, calculate the maximum loan

amount Stephen can borrow. Briefly explain. In your working, you are REQUIRED to show the

different loan amounts using the cap of LTV ratio, DSR and stress$-$DSR respectively. $(12$ marks$)$

$($d$)$ Based on your answer in part $($c$),$ what is the actual LTV of Stephen's mortgage loan? $[$Answer in

$\%$ with $2$ decimal places.$]$