Question

Mr. Khalid Al Bulushi is interested to buy the house at RO 105,000. He approached the Bank Dhofar for a home loan. The bank has approved the loan application for a 20-year fixed-rate loan at 6% annual interest compounded annually and asked him to make 10% of property cost as a down payment.

a) What would be the monthly installment Mr. Khalid needs to pay?

b) What will be the total deferred payment Khalid has to pay?

c) Why did bank ask Mr. Khalid to make 10% of property cost as a down payment?. Critically discuss.

d) If Mr. Khalid fails to pay the monthly installment, what action bank will take? Discuss

I need help in solving this question pleas

Answer 1

a) Monthly instalment using the financial calculator:

N =20 I/Y = 6, PV, 105000 * 90% = 94500, FV = 0

Compute PMT we get, 8238.94

b) Total deferred payment = Instalment * Number of Years = 8238.94 * 20 = 164778.81

c) Reason Khalid is asked to pay 10% for the property as this property is a security and down payment acts as a margin (haircut) taken on asset. Hence this provides an additional comfort to the lender to lend money

d) In case the borrower defaults, lender can liquidate the asset and recover all the pending dues from the borrower.