Jairam Sukhram wants to borrow $400,000 in a residential mortgage from the Bank of Northwestern Ontario so that he can buy a condo in Leslieville. Jairam loves time value of money problems and so he figures out the details himself to make sure he can afford the payments. The interest rate is 3.99% per annum for a five year term and the amortisation period is 25 years.
a)What is the monthly payment? (2 marks)
b)Five years go by and it is time to renew. The bank will charge 3.79% on the loan. If he keeps to the original amortisation plan, the mortgage will have 20 years until it is paid off. How much will his monthly payment be after renewal, if he does stay with the original amortisation that now has 20 years to run? (3 marks)
c)An alternative plan is to keep the same payment amount that he paid for the first five years and change the length of the amortisation period. Is there a good reason to adopt this alternative plan? No calculation required.
Hint
"a) A monthly payment is a amount that a borrower, until a debt is paid off, is required to pay each month.The monthly payments are usually specified in the loan documents like how are they calculated, when they are due, and what would happen if those payments are not made as agreed.And, according to data, the payment would be $2,109.14 every month for 25 years to payoff the debt.The total o...
"a) A monthly payment is a amount that a borrower, until a debt is paid off, is required to pay each month.
The monthly payments are usually specified in the loan documents like how are they calculated, when they are due, and what would happen if those payments are not made as agreed.
And, according to data, the payment would be $2,109.14 every month for 25 years to payoff the debt.
The total of all those 300 payments would be $632,741.81 and,
The total interest on those payments would be $232,741.81"
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