Question 4 Mortgages can be taken out at a fixed interest rate over a period of time, which means that the interest rate cannot be changed during the time period agreed upon. It is common for interest rates to be variable, which means that the bank can adjust them up or down at any time. At the time that a loan is taken out, fixed interest rates are usually higher than variable interest rates. a Suppose that Kim and Lee borrow $210 000 from the Commonwealth Bank at a fixed interest rate of 7% p.a., compounded monthly, for 5 years. How much would they still 5 owe at the end of this time if they make monthly repayments of $1500? b Consider the following situation. Another couple, Dale and Jude borrow the same amount ($210 000) as Kim and Lee from the Commonwealth Bank. They borrow at the same time and make the same repayments of $1500. However, Dale and Jude choose the variable interest rate of 6% p.a., compounded monthly. Suppose that after 2 years the interest rate increases to 8% p.a., compounded monthly, where it remains for the next 3 years. i How much would Dale and Jude still owe after 2 years? How much would Dale and Jude still owe after 5 years? Compare Kim and Lee's situation after 5 years with that of Dale and Jude. Which couple would be better off? Explain. d Another person, Citra, intends to borrow $210 000 from ANZ Bank at 5.95% p.a. as an interest-only loan to buy a one-bedroom apartment as an investment. She hopes eventually to make a capital gain (i.e. money arising from an increase in value of the apartment over time). i What would Citra's monthly repayment be? ji How much would Citra still owe after 5 years? Page 7 of 9