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We have a 10-year mortgage for $300,000 at 9.75% p.a. It is to be repaid in...

We have a 10-year mortgage for $300,000 at 9.75% p.a. It is to be repaid in monthly repayments.

(a) What is the repayment amount? Assume the interest is compounded monthly. Which formula should you use to solve this problem?

(b) What is the balance outstanding after two years? How much principal and how much interest have been paid?

(c) After two years, the interest rate falls to 9.25% p.a. What prepayment penalty would make it unattractive to prepay the loan?

(d) What is the new PV after two years with the same monthly payments? What is the prepayment penalty to make it unattractive to prepay the loan?

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Homework Answers

Answer #1

(a) We will use modify the Present value of annuity to calculate the monthly repayment amount.

repayment amount =

(b) Balance outstanding after 2 years (96 payments remaining) =  

Principal paid = 300000 - 260806.70 = $39,193.30
Interest paid = 24*3923.11-39193.30 = $54,961.28

(c), (d) PV after two years with the same monthly payments =  

prepayment penalty to make it unattractive to prepay the loan = 265429.56-260806.70 = $4,622.86

Please do rate me and mention doubts, if any, in the comments section.

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