DFP Module 2 - Time Value Money

ACTIVITY: TIME VALUE MONEY MORTGAGE #6

BACKGROUND

Aaron and Kate are considering whether or not to buy a particular property valued at $950,000. They have $350,000 of their own funds to commit towards the purchase and they expect to incur an additional $50,000 in fees and stamp duty on the purchase itself. They are able to borrow at an interest rate of 6.0% per annum with interest compounded monthly.

Loan repayments would be monthly with the first payment due at the end of the first month after purchasing the property. The term of the home loan is 30 years. They both work full-time earning a combined after-tax salary of $11500 per month

Question 1: How much is the monthly mortgage payment Aaron and Kate will be required to pay for their loan?

You may use Formula 3 in the time value money spreadsheet provided with the course material.

Hint: because the interest is compounded monthly, we need to use the number of months for the mortgage loan, not the number of years, when determining the regular payments to be made.We also need to use the monthly interest rate (6.0% /12 = 0.5%)if we use the spreadsheet formula.

If you prefer to use an online mortgage calculator, be careful here as they may have slight differences. This one would suit this exercise:

http://www.nab.com.au/personal/loans/home-loans/loan-calculators/loan-repayments-calculator

Provide your answer here$Answer Required

Question 2:Will Aaron and Kate face mortgage stress at current interest rates?

A loan affordability ratio is equal to the monthly home loan repayment divided by a couple's household

after-tax monthly income. A key threshold for 'mortgage stress' is when the loan affordability ratio reaches 35%.

Provide your answer here

Loan affordability ratio:Answer Required

Question 3: After 1 year, the bank informs Aaron and Kate that $642,017.92is still owing on their loan. How much in totalhave Aaron and Kate paid in mortgage payments during the first year?

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Question 4: How much of the amount repaid in the first year has gone towards reducing the principal amount borrowed?

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Question 5: How much interest have Aaron and Kate paid in year 1?

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Question 6:If the bank now increases interest rates from 6.0% to 7.2%, what will Aaron and Kate's new monthly mortgage repayments be?

Hint: remember to use monthly interest rates. And, remember that there are only 29 years left on the loan (usemonths not years).

Provide your answer here$Answer Required