Question

Hi, can you answer this question in more detail?

Subject: Hong Kong Personal Financial Planning Practice

Q7. B

Y is planning to buy an apartment in Hong Kong and would like to apply for a mortgage. You are his financial planner and he has the following question for you, “the bank manager told me that they will consider (i) Loan-to-value ratio, (ii) Repayment ability, (iii) Debt-to-income ratio, (iv) Age of building, (v) Loan term, and (vi) Age of borrower. What are they and why are they important to mortgage applications? Please tell me the details.”

(Words: 700 - Don't direct copy)

Answer 1

(i) Loan to Value Ratio- In a mortgage, loan to value ratio is a name which is used to express the ratio between the loan amount and the value of the asset which is purchased. It is important to assess the risk of the lender. Higher the loan-to-value ratio, the higher will be the risk for the lender. Lower loan-to-value ratio poses less risk for the lenders.

(ii) Repayment ability- Repayment ability reflects the financial position of the borrower i.e. the ability of the borrower to payback the debt borrowed. It is important for the lender to know before lending the loan amount in order to assess the credit worthiness of the borrower. It is the responsibility of the lender to find out the income, employement, expenses etc of the borrower beforehand to avoid any default by the borrower in reapayment.

(iii) Debt-to-income ratio- It is an important ratio which calculates the borrower's monthly income which goes towards the payment of the debt installements. It is important for the lender to know the debt-to-income ratio in order to calculate the monthly installements of the debt and in defining the loan term i.e. debt-to-income ratio helps in deciding the monthly installements of the loan based on the repayment capacity of the borrower.

(iv)Age of the building- Age of building is a factor considered by the lender before granting the loan because it will determine the guarantee of the repayment of the loan as newer the building, more the chances of fulfillment of repayment i.e. if the borrower fails to repay the installment, the lender can take the possession of the building and recover its loan. However, if the building is old, the chances of its getting obselete is higher which will create issues for the lender to recover its loan in case of default by the borrower

(v) Loan Term- Loan term is decided before the grant of the loan and refers to the total time period in which the loan will repayed by the borrower in the form of minimum pre-decided installments. It is important as it affects your montly installements and your total interest costs. If the loan term is longer, the montly installements will be less but at the same time the interest costs will go higher due to the longer term. However, if a long term is shorter, the monthly installments will be more but interest costs will be less.

(vi)Age of the borrower- It is important to know that the lender cannot deny you the loan based on your age but age is certainly a factor which is considered by the lender to determine the credit worthiness of the borrower. The lender, before lending, looks at the borrower's income. So, if a borrower is aged or is about to retire, then it will affect its income which in turn will hamper his ability to repay the loan. That's why age becomes a factor in case of granting of loans. On the other hand, if the borrower is young and has a stable earning, it will be easier for them to secure loans as it assures the lender of its full repayment.