5) Angela takes out a 25-year repayment (amortising) mortgage of 125,000 at an annual interest rate of 4% to buy a 125,000 house. Inflation is 0%.

a)

b)

c) Calculate the house value to total payments ratios for both the zero inflation and the 3% inflation cases. Using this metric explain in which inflation environment mortgagors (mortgage borrowers) are better off.

d) Calculate the monthly mortgage payment to monthly income ratios for both the zero inflation and the first year of the 3% inflation cases. Assume that monthly income is 2,000 for the zero-inflation case and 2,060 for the 3% inflation environment. Using this metric explain in which inflation environment mortgagors (mortgage borrowers) are better off.