Unformatted text preview: Financing Real Estate
Real Estate Finance HKU UG K. S. Maurice Tse
School of Economics and Finance The University of Hong Kong Effect of Mortgage Interest Rates on Property Market Tuesday, January 31, 2006, South China Morning Post High rates sink sales in primary market “Only 100 units expected to have been sold this month as homebuyers stay put.” Tuesday, February 21, 2006; South China Morning Post Mortgage war triggers rally in property stocks “Property stocks shone as investors expect the lower mortgage rates offered by banks to send property prices up. The increase in sales of new flats was also read as a good indication of a bullish property market.” Reported Issues on Negative Equity Friday, January 13, 2006, South China Morning Post Negative equity: Who bears most pain “The typical homeowner struggling with negative equity is a middle-income household earning between $20,000 and $50,000 a month that bought a property below 600 square feet in the New Territories at the height of the 1997 boom.” Tuesday, February 7, 2006; South China Morning Post Negative equity jangles nerves 70pc of affected households bought at 1997 peak, says HKMA “Almost 2,000 more households slipped into negative equity in the final three months of last year, a 21 per cent surge over the previous quarter to 11,000 mortgages with an aggregate value of $19 billion.” Yam blames rising interest rates as 21pc more homeowners fall outside the comfort zone in second quarterly increase Content Classification of Mortgages by Repayment Method Term Loan (Straight Loan) Fully Amortized Mortgages Partially Amortized Mortgages Fixed Interest Rate Mortgage Loans Growing-Equity Mortgages (GEM) Rapid-Payment Mortgages (RPM) Biweekly Mortgages Graduated Payment Mortgage (GPM) Adjustable Rate Mortgages Shared-Appreciation Mortgages (SAM) Analysis of Residential Finance Special Mortgage: Reverse Mortgage Incremental Borrowing Cost I. Classification of Mortgages by Repayment Method Term Loan (Straight Loan) Principal + Interest | | I I I I I | |_______|_______|_______|_______|_______|______.....________________|_ 0 1 2 3 4 5...................... n The straight or term mortgage loan provides for repayment of the principal amount of the loan at maturity. No provision is made to reduce the principal during the term of the loan. The borrower pays interest only at stated intervals, usually monthly, quarterly, semiannually, or annually. At the end of the loan term, the principal amount of the loan must be paid off along with the unpaid interest. The term of the loan usually varies from one to five years. Classification of Mortgages by Repayment Method Fully Amortized Mortgages PMT PMT PMT PMT PMT PMT PMT | | | | | | | | | | | | | | |_______|_______|_______|_______|_______|______....._________|______|_ 0 1 2 3 4 5...................... n Fully amortized mortgage provides for gradual repayment of the total principal amount over the term of the loan. Borrower makes periodic payments which include both p...
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