GE1202 Managing Your Personal Finance Lecture 5 PDF

GE1202 Managing Your Personal Finance Lecture 5 Purchasing Homes HK Property Market Average Prices for Private Domestic Housing in 40 - 69.9 m2 In 1997, many homeowners 160 000 in Hong Kong had negative 140 000...

GE1202 Managing Your Personal Finance Lecture 5 Purchasing Homes HK Property Market Average Prices for Private Domestic Housing in 40 - 69.9 m2 In 1997, many homeowners 160 000 in Hong Kong had negative 140 000 equity 120 000 Outstanding value of mortgage > the current value 100 000 of home 80 000 Home foreclosures 60 000 The process whereby lenders attempt to recover loan 40 000 balances from borrowers who 20 000 have quit making payments by forcing the sale of the 0 home pledged as collateral 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 HK Island Kowloon NT HK Property Market The property price went down to the bottom in 2003 and Mortgage rate rebounded quickly The long lasting low interest rate environment fuelled the property market, leading to a rocket rise since 2009. Should You Buy Your Home? Opportunity costs of homeownership Closing Costs Interest Charged on Mortgage Payments Taxes Insurance Fire insurance Homeowner’s insurance Maintenance Lost of interest on Down Payment and Closing Costs Closing Costs Closing costs are all expenses that borrowers ordinarily pay when a mortgage loan is closed and they receive title to the purchased property Loan application and loan origination fees paid to the lender Mortgage points Insurance fees Appraisal fees Title check The research of legal documents and courthouse record to verify the seller conveying title actually has the legal interest he or she claims and that the title is free of all liens and encumbrances Attorneys’ fees and other miscellaneous fees Property agent commission – 1% of the property price Interest Charged on Mortgage Payments Most of the people purchase their properties that make use of the mortgage services from the bank Mortgage loan is secured on the borrower's property According to the guideline issued by the Hong Kong Monetary Authority, banks have to comply with a 60% loan-to-value (LTV) requirement on owner-occupied residential mortgage lending for properties valued below HK$7 million A down payment 40% of the full purchase price Interest Charged on Mortgage Payments There are two types of mortgage 1. Fixed-Rate, Fixed Repayment Mortgage Conventional Both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan 20-year, 25-year and 30-year 2. Adjusted-Rate Mortgage (ARM) During the life of the loan the interest rate varies Two commonly used ARM in Hong Kong Prime-based Mortgage HIBOR-based Mortgage Interest Charged on Mortgage Payments Prime-based Mortgage Prime rate A reference interest rate used by banks lending to customers with good credit Mortgage rate = Prime rate – spread eg: 5.25% - 3.1% = 2.15% The interest rate is relatively stable Interest rate change when banks adjust the prime rate Interest Charged on Mortgage Payments How to find the interest charges on the loan? Mortgage payment is made up partly of principal repayment on the loan and partly of interest charges on the loan. Amortization table is an method to identify how much of your repayment is used to repay the principal of the loan Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time Example The property worth 3m and applied a 70% mortgage loan with 15 years. Assume prime rate = 5% and does not change in the whole period Interest Charged on Mortgage Payments Step 1: Find the monthly payment r(L) P= 1 − (1 + r)−𝑛 L = 3m x 70% = 2.1m r = 3%/12 = 0.25% n = 15 x 12 = 180 months P = $14502.2 per month Interest Charged on Mortgage Payments Step 2: Calculate your interest part for the 1st month 2.1m x 0.25% = $5250 Step 3: Repayment – interest part for the 1st month = principal repayment for the 1st month $14502.2 - $5250 =$9252.2 Step 4: Your beginning outstanding balance – your principal repayment = Your ending outstanding balance. $2,100,000 - $9252.2 = $2,090,747,8 Step 5 repeat the step 2-4 for the subsequent month Interest Charged on Mortgage Payments Month Monthly Principal Interest part Ending Month Beginning payment repayment (C) balance balance (A) (B) (D) Equal to Compute Equal to Equal to Equal to pervious ending with the (A) X r (B) – (C) (A) – (D) balance equation 1 2100000 14502.21 5250 9252.2 2090747.79 2 2090747.79 14502.21 5226.87 9275.3 2081472.45 3 2081472.449 14502.21 5203.68 9298.5 2072173.92 4 2072173.921 14502.21 5180.43 9321.8 2062852.15 Interest Charged on Mortgage Payments Mortgage Insurance Programme (MIP) Government financing programme As long as an application meets the relevant eligibility criteria (e.g. the maximum property value and the maximum loan amount, etc.), the bank can provide a mortgage loan of up to 80% LTV ratio under the MIP Lower down payment than conventional 20% down payment Interest Charged on Mortgage Payments Interest Charged on Mortgage Payments Taxes With effect from 23 February 2013, unless specifically exempted or otherwise provided, stamp duty on sale or transfer of immovable property in Hong Kong is chargeable with ad valorem stamp duty (AVD) at higher rates Alternative – Renting Advantages of renting Easier to move Fewer maintenance and repair responsibilities Lower initial costs Disadvantages of renting No tax benefits Limitations regarding remodeling Restrictions regarding pets and other activities Legal concerns of a lease Costs including a security deposit, utilities and renter’s insurance Not a permanent residence The Rental Contract (Lease Agreement) When you rent an apartment, duplex, house, or any other type of residence, you’ll be required to sign a rental contract or lease agreement Contract Protects Lessor/Landlord = Owner Lessee/Tenant = One who leases Contract Specifies Monthly rent and due date Penalties for late payment Length of lease agreement Deposit requirement Renewal options Amount of security deposit The right to sublet the unit Buy? Rent? To choose the lowest-cost alternative, compare the cost of renting with the cost of buying Use different assumptions Rent increases Mortgage rates Home appreciation rates The rate of return that you can earn on the funds you could invest Need to consider non- monetary items Should You Buy Your Home? Benefits of Home Ownership Financial benefits Deduct property taxes and mortgage interest Potential increase in value of your home Building equity in your home Psychological reward Pride of ownership, feeling of permanence and sense of stability Lifestyle flexibility Privacy The desire to personalize your home, Stability Home Affordability How large a monthly mortgage payment can you afford? Traditional financial guidelines suggest Spend no more than 25-33% of take-home pay on housing Mortgage Calculator http://www.gohome.com.hk/mortgage-calculator/en/ Stress Testing Banks must assume a mortgage rate increased of 300 basis points (3%) in stress- testing mortgage applicants’ repayment ability Home Buying Process 1. Evaluate your homeownership needs Be rational when make a decision Benefit > Cost 2. Find a property to purchase Selecting a Location Be aware of zoning laws The regulation of the use of real property by government, restricts particular territory to residential, commercial, industrial, or other uses Assess the school system if you have children. Using a real estate agent They present your offer, negotiate the price, assist you in obtaining financing, and represent you at the closing Conduct a home inspection or hire an inspector Mortgage company may want an appraisal Home Buying Process 3. Pricing the property Determine the home price Price is affected by whether it is a seller’s or a buyer’s market Property valuation by mortgage firms Upper limit = 5% higher than the estimated value Calculate the costs Determine the amount of the down payment 30% down payment Investigate the rates, types, & terms of mortgages Home Buying Process 4. Negotiating the Purchase Price Counteroffers are common Earnest money Contingency clauses Buyer must be able to obtain financing Sale contingent on the sale of the buyer’s current home 5. Obtain financing Apply for a mortgage and evaluate types of mortgages. Qualifying for a mortgage Includes your income, debts, credit history, down payment amount, length of the loan, and current mortgage rates Guarantor Home Buying Process 6. Closing the transaction Documents signed; meeting of buyer, seller, and lender Closing costs include: Title check The research of legal documents and courthouse record to verify the seller conveying title actually has the legal interest he or she claims and that the title is free of all liens and encumbrances Attorney’s and appraisers fees Property survey Stamp duty Real estate commission How To Acquire a Mortgage There are in general Five steps to apply mortgage 1. Complete the application form and enclose the relevant documents 2. The bank will then arrange for a valuation of the property and determine the maximum loan amount based on the appraised property value and your repayment ability 3. Upon loan approval, the bank will: Arrange for you to sign the Letter of Offer Notify the solicitor(s) to prepare the legal charge How To Acquire a Mortgage 4. After all legal documents have been signed, the solicitor will notify the bank to disburse the mortgage amount to the seller via the solicitor and the transaction is then completed. 5. Finally, the bank will send you a schedule of monthly mortgage repayment, detailing the principal and interest to be repaid and the outstanding balance of each month Sources of Mortgage Loans Retail Bank Mortgage broker A firm that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders, the broker merely takes loan applications and then finds lenders willing to grant the mortgage loans under the desired terms. http://mreferral.com/index.php Mortgage Selection When you see this situation in two banks BANK A “prime – 2.8%” BANK B “prime – 2.65%” Is bank A more preferable? There are some terms we need to consider Mortgage amount Cash reimbursement Interest penalty period When To Buy Your First Home? The timing of when to buy a first home depends on your Current and expected income and expenses Reliable income Ability to make at least 10% down payment and to cover closing costs Ability to finance home-maintenance and improvement projects Adequate savings and a cash reserve sufficient to handle the loss of your job or another financial challenge for at least a few months Credit history Future plans The desire to build equity and to be eligible for homeowner tax breaks and credits Your preferred lifestyle A plan to stay in your home for a least a few years Effective Home-Buying Strategies Don’t wipe out your savings Pick the right neighborhood Stay away from the most expensive home in the neighborhood Interview your agent and ask hard questions Rely on professional advice Use traditional financing Don’t change the financial picture before closing Be sure to do the home inspection Be careful about taking on additional debt after closing