You are arranging a $350,000 Canadian mortgage with a 25-year amortization period and a 7 percent posted interest rate. What is the monthly mortgage payment? Suppose the bank offers you the opportunity to pay your monthly payments in two equal installments (pay on-half of the monthly payment every two weeks). How much faster will you pay off your mortgage this way?
Monthly payment can be calculated using PMT function
N = 25 x 12 = 300, PV = 350,000, I/Y = 7%/12, FV = 0
=> Compute PMT = $2,473.73
EAR = (1 + APR/n)^n - 1 = (1 + 7%/12)^12 - 1 = 7.23% for 12 months payments
If payments are made twice every month, APR = ((1 + EAR)^(1/n) - 1) x n = ((1 + 7.23%)^(1/24) - 1) x 24 = 6.99%
No. of payments can be calculated using N function
I/Y = 6.99%/24, PV = 350,000, PMT = 2,473.73 / 2 = $1,236.86, FV = 0
=> Compute N = 597.65 payments
Hence, you would only be able to pay your mortgage by 2.35 months.
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