Please answer the following question and give the explanation 1.aising interest
ID: 2780808 • Letter: P
Question
Please answer the following question and give the explanation 1.aising interest rates generally: a)locrease cap rates and reduce property values blReduce cap rates and increase property values alncrease cap rates and increase property values d)Reduce cap rates and reduce property values 2) A higher LTV loan a·Reduces the risk to the borrower and reduces the risk to the lender blReduces the risk to the borrower and increases the risk to the lender cl Increases the risk to the borrower and reduces the risk to the lender dlacreases the risk to the borrower and increases the risk to the lenderExplanation / Answer
The rise in the interest rates generally is observed as increase in the cap rates and due to this we can see the borrowers become risk averse and slow down their plan of investment, this is because the spendable income with the people become less and hence they found it difficult to invest in properties and hence the property values tend to fall. This assumption stands good only when considered all other factors affecting property value remains constant. But there is another factor called inflation which is one of the critical driver of property values to go hand in hand. While rising interest rates can reduce the value of future cash-flows, inflation can in turn increase the value of physical property due to the fact that real estate is a hard asset. Ultimately, if the increase in property value from inflation overtakes the decrease caused by rising rates the results will be always positive.
2.The loan-to-value ratio (LTV ratio) is a ratio which asses the lending risk that financial institutions bears before approving a mortgage. Hence assessments with high LTV ratios are generally seen as higher risk. Hence the higher LTV is the higher risk to the borrower and Lender too because there may be chances of defaulting in the payment by the lender. The LTV ratio is calculated as the amount of the mortgage lien divided by the appraised value of the property, expressed as a percentage. The loan-to-value ratio is not the only determining factor in securing a mortgage or home equity loan or line of credit, the metric does play a substantial role in how much borrowing costs the homeowner. Most of the Lenders offer mortgage and home applicants the lowest interest rate when the LTV ratio is at or below 80%