Question 2 (20 marks)

Vincent is going to purchase an apartment in Shatin and the current property price is $7 million. Meanwhile, Vincent has $3 million in his saving account.

A) If the loan-to-value ratio is 60%, what is the maximum amount that Vincent can borrow from a licensed bank? However, since Vincent has saving, what is the minimum amount he needs to borrow? (3 marks)

B) DBS is willing to lend Vincent a fully-amortizing mortgage loan for 25 years (base on the minimum amount you calculated in (A)) at Prime rate minus 2.7%. If the current prime rate is 5.25%, find his monthly payments. (3 marks)

C) Suggest and explain one reason for Vincent using an adjustable rate mortgage instead of a fixed rate mortgage. (3 marks)

D) However, Vincent wants to borrow another $300,000 to furnish and decorate his new home. DBS agrees to lend him a bigger loan (i.e. the minimum amount + $300,000) but the interest rate charged will be calculated on Prime rate minus 2.4% instead. Find Vincents monthly payments for the bigger loan. (2 marks)

E) Compare the two loans mentioned in (B) and (D), what is Vincents incremental cost of borrowing the extra $300,000? (5 marks)

F) Vincent believes the value of his property will grow by 4% a year. If he plans to sell his property after 5 years, what will be the expected selling price and his loan balance at that time? (4 marks)