Marketing Principle

Lecture 6 Mortgage

What 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 card

Conditions 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 – inflation

Applying for a mortgage loan

1. Provide materials (pay slips, employment certificate, bank statement, credit card, asset, liability…)
2. Lender➔ estimate ability and willingness to repay.

➔ property price, borrower’s deposit首付, income needed to meet the loan repayments

Plain vanilla mortgages

Fixed rate

Variable rate eg: “standard mortgage” VRM in Aus

1. Basics of FRM:

Definition: Interest rate fixed for the life of loan

Principal-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 constant

Rule of thumb: loan principal贷款本金 should not be more than 4 times the annual income.

1. The principal as time passes

Repayment= 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

1. Solving for the loan terms

Repayment-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)

VRM

Definition: 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i

lender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FRM

1. Change repayment amount:

• Principal outstanding after 2 yrs.
• New repayment 换P0

1. Change the loan term:
2. 混和上面两种

Fix or float?

For average borrower – doesn’t matter

Why you are not average? Different risk, expectation, default profile