Question
1. Your personal finance goal is to own your own home and approach your bank for a mortgage loan to buy a house. Your bank is prepared to grant you and your partner a loan not exceeding 21/2 times your joint gross annual income for a period of 25 years You earn a gross salary of ￡50,000 per year, and your partner's annual income is ￡30,000 The bank would require a down payment of 5 percent,and have quoted 6% p.a. for the repayment mortgage. Your bank is also prepared to make an alternative offer of an interest-only/endowment mortgage for the same maximum amount with an annual interest rate of 6.75% p.a., and payment of a fixed amount into an endowment fund that expects to earn a net return of 9% p.a. over the 25-year period of the mortgage. Required: (i) Evaluate the approximate price of the house that you and your partner would be able to afford, if you are granted the maximum possible amount of mortgage loan. Calculate the monthly mortgage payment that you would be required to make for the repayment mortgage. [6 marks] (iii) Assuming that you and your partner are prepared to pay the same total amount out of your monthly salary under either of the proposals, which of the two mortgages would be more cost-effective? [10 marks] [18 marks]
Answer
4.1
(198 Votes)
Alexis
Professional · Tutor for 6 years
Answer
【Answer_i】:Your joint income with your partner is
. Hence, the maximum mortgage loan you will be granted by the bank is
. Knowing that down payment is 5 percent, therefore cost of your house can be given by
.【Answer_ii】1. Initially we have C = maximum loan or cost of house= Monthly repayment,M = mortgage amount * { r*(1+r)^n } / {(1+r)^n - 1} where r = interest per month and n renovation period in months2. Substitutes as, M = 200000 * { 0.005*(1+0.005)^300 } / {(1+0.005)^300 - 1} = £ 5578.83【Answer_iii】1. Under the interest only mortgage, monthly installements for interests ,(P´) = mortgage amount* interest rate per month And rate of return after maturity = pvement per month* special sum of sereis formula2. substitutes as: P’ = 200000* 0.005625 (for annual rate paid out monthly P´' = 1666.67 / month autosaving rebate of the proposal = MP'/interest (/+ from surplus = £ Net Diff) Subsitutes as: \(£ 5578.83 - £ 1666.67 - {{{ £252.92 + theme \br \>, \ moneyave/ss}*5287/ufen_bal_appro_value/mock-m_confitlement/img_do>r 3. This net difference as a result of autosaving raise from the fundamental ends , £ One sunth's difference in - Mo £ muthe re-price funds/months 4 . It should be discussed Two propouses endowment versus.other residential plans have equal periodsHints: The net sonicuny are as a floating rate investment , but is more likely that the mathastic idea ofcome-house (special inst.). If rate ints1% 5 acres rate all_fil-get thatuation justify/re-fil>If the proposal calculates endowment principle against alternative Special cmiles_the Sage,l)lustionsgisposopts themhat at least Dok_hactive = anway me compenfun_he mopa elig1 Messiah Pry.
Explanation
(i) For this question, firstly, we have to calculate the maximum mortgage income that the bank is willing to grant. This can be calculated by multiplying
times total joint gross income of you and your partner. Afterwards, having this amount, the price of the house you can afford can be determined. This will be obtained by dividing the maximum mortgage loan by 95% (Since 5% is the Down-payment).(ii) The Monthly Mortgage payment plan can be calculated using the formula for Annuities with the Annual Interest rate divided by 12 and term(years) multiplied by 12.Since interest per month would be considering 6% p.a /12 ,taking the period of anuities as 25 years i.e 300months.(iii) The cost effectiveness of the installements under praposal for two mortgages can be calculated by finding optimally prudent choice. If endowment mortgage is attractive if they earn more with the economy over a long period of time 25 years than one would pay out over the time period on savings on lower mortgage payments against the it, we know that return is more than paid interest om the loan.