Question
A borrower obtained a fully amortising loan of $800,000 at 4% p.a. for 25 years. After 5 years, mortgage rates have dropped, so that a
A borrower obtained a fully amortising loan of $800,000 at 4% p.a. for 25 years. After 5 years, mortgage rates have dropped, so that a fully amortising 20-year loan can be obtained at 3.5% p.a. The early repayment (exit cost) and other refinancing costs will be $4,000.
i. What is the current monthly payment and current total outstanding balance after 5 years? (2 Marks)
ii. Is refinancing desirable? (3 Marks)
iii. Due to Covid-19, the new lender offers interest-only mortgage payment for the next 12 months. Assuming the borrower agrees to refinance and accepts this offer from the lender, what is the interest-only mortgage payment of the first month on the loan balance after 5 years? (1 Mark)
iv. If interest-only mortgage payment is maintained for the entire 12 months period, explain how would this impact on the loan balance (2 Marks)
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