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Lecture 6 MortgageWhat is a mortgage?A form of secured lending (eg:pawnshop当铺，car loans)The loan is “secured” against the property over which the mortgage is taken.Unsecured lending== based on reputation, eg: credit cardConditions of contract:Loan(term,r,repayment) and property(insurance, limitation on use, location)Different conditions, different interest rate because if you change the property that use the insurance, you are changing the underlying risk of the financial instrument and if you are changing the underlying risk of the financial instrument, a different rate maybe charged.R higher in 2015 Mortgage rate stable – inflationApplying for a mortgage loanProvide materials (pay slips, employment certificate, bank statement, credit card, asset, liability…)Lender➔ estimate ability and willingness to repay.➔ property price, borrower’s deposit首付, income needed to meet the loan repaymentsPlain vanilla mortgagesFixed rate Variable rate eg: “standard mortgage” VRM in AusBasics of FRM:Definition: Interest rate fixed for the life of loanPrincipal-and-interest loan/ annuity
Since it is fixed, as you pay down, the interest is going to drop, principle payment goes up.P0=PMT*A(n,i)—– PV of an ordinary annuity of $1 per period/ annuity factor/ mortgage constantRule of thumb: loan principal贷款本金 should not be more than 4 times the annual income.The principal as time passesRepayment= principal + interest(Amortised!)原理： 一开始interest 大，所以repay的principal的比例小，但时间过去后，因为principal的减小，interest component减小，principal component所占的比例大了，最终principal全部repaid然后loan被paid off. 3. Principal outstanding Definition: the PV of the remaining payments 还有多少本金没付Solving for the loan termsRepayment-interest owing 不可能小于0，只有在算错的时候才可能*考虑interest only loan Lecture 7 Mortgage (2)VRMDefinition: interest rate is changed from time to time during the life of the loan, usually in line with interest rate movements in the economy. 根据合同来决定ilender给贷者：决定要不要follow FRM 或 VRM, 重要的是根据money market rates来改变mortgage rate的速度！决定risk of rising interest rates，很多人不愿意忍受fixed margin. borrower 借贷者： 承担risk如果I变了， 有3种应对政策：还是用FRMChange repayment amount: Principal outstanding after 2 yrs.New repayment 换P0Change the loan term:混和上面两种Fix or float?For average borrower – doesn’t matterWhy you are not average? Different risk, expectation, default profile