Assume that a residential property is advertised for a price of 165,000. Comparable property in the same neighbourhood could be currently rented for 550 per month. The ownership option involves a deposit of 20% of the property value. The remaining balance is financed with a fully amortising mortgage loan with an interest rate of 3% for 20 years.

The cost of homeownership also includes annual maintenance (300 p.a.) and insurance (100 p.a.). Mortgage payments are not tax deductible. You have done research in the market area and found that properties have historically appreciated at an annual rate of 3% per year while rents remained unchanged over time. Real estate agents commission is 4% of the transaction (resale) price in the local residential market.

Please answer c + d

c) Determine the monthly mortgage repayment and the outstanding mortgage balance after two years of mortgage payments. (20 marks)

d) Determine the net cashflows of homeownership for the first and the second year of homeownership. Assume that the investor requires a return of 10%. Discuss whether this investor would find it preferable to buy the property, use it as a main residence, and resell it after two years (rather than renting the property). (40 marks)