a) A borrower takes a loan of 200,000 over 20 years to purchase a property. Repayments are made annually in arrear, and payments increase by 5% of the first payment at the end of each of years 2 to 10. The lender charges 6% interest per annum effective.

b) The borrower finds it difficult to meet the increase in payments. Immediately before the 7th payment is due he asks the lender if he can increase his repayments as planned at the 7th anniversary of the loan but then keep repayments at this level thereafter. The lender agrees to the request on condition that the term of the loan is extended. The lender charges interest at 8% per annum effective on the rescheduled loan. The lender also charges a fee of 500 immediately. The fee will be added to the loan.