Case study 2 -Mortgages

Mr. and Mrs. Minott and their four children live in their own home at 40 Park Place, on which they have a mortgage balance of $3,500,000. As the Minotts reckon that the family has outgrown the property, it has been put up for sale at its current appraised value of $16,000,000. A purchaser has been identified but the proceeds from the sale is not due to be paid to the Minotts until June 30, 2021.

In the meantime the Minotts have contracted to purchase a new home at Hill Glades for $35,000, 000., although this property is valued at only $30,000,000. The sale agreement on this property requires a deposit of 20% on signing which will took place on February 16, 2021, with the balance which will not be covered by a mortgage, payable in 45 days after signing.

Based on their high salaries, Caribbean Building Society have pre-approved the Minotts for a 25-year mortgage of 75% of purchase price or value, whichever is less, up to a maximum of $23,000,000. This will attract an interest rate of 5.50% per annum with monthly compounding and will be disbursed on June 30, 2021.

MVBS Ltd, a commercial bank , is offering a bridging loan of up to $34,500,000 for up to 91 days at an interest rate of 8.50% per annum and the Minotts will only use the minimum amount needed of this loan.

A closing cost of $1,250,000, which must be paid on signing of the sale agreement, will be associated with purhase of the new home.

The Minotts also have savings of $ 2,250,000 which will be available for use in their new home transactions.

Final payment for the new property, possession of both properties and disbursement of the bridging loan will take place on April 1, 2021.

The Minotts also have a zero coupon bond with a face value of $14,000,000 ( that means that they will only get $14,000,000 at maturity) that will mature on June 30, 2031, that is, 10 years after the mortgage was disbursed. They are contemplating using all the proceeds from that bond at maturity to pay on their mortgage loan.

a. How much cash must the Minotts pay on signing the sale agreement for their new home? (2 Marks)

b. How much of the purchase price will be financed by the long-term mortgage? (2Marks)

c. How much should they pay on the second deposit? (2 Marks)

d. How much equity does the Minotts have in their old house? (2 Marks)

e. When the Minotts move in, what will be their equity in the property, assuming that the value of the new home remains at its current valution? (2marks)

f. How much should they borrow if they take a bridge loan? (bearing in mind that they will only use the minimum needed)? (3 Marks)

g. What is the maximum that the Minotts can afford to pay on the new car? (2 Marks)

h. Use Excel to construct a full amortisation table showing the balance of the loan at maturity. (Upload the Excel workbook) (4 Marks)

i. In the event that the Minotts decide to use proceeds from the bond immediately it matures to pay off their mortgage, will they have sufficient funds to do so? How much interest will they have paid over the period? This question must be manually calculated showing all workings. (4 Marks)

j. If the Minotts are planning to keep their new mortgage until maturity, what would be the total interest payable over the period, assuming that the interest rate remains unchanged? This question must be manually calculated showing all workings. (2 Marks)