Home / Questions / Your friend wanted to buy a two-bedroom apartment in St Lucia that is priced at $560000 Ho...
Your friend wanted to buy a two-bedroom apartment in St. Lucia that is priced at $560,000. However,
she does not understand the logic behind a mortgage payment. Your training at UQ Business School has
prepared you well for this situation and you are going to help her with your knowledge from "FINM7401
Finance" to assess different finance options as shown in below:
Floating-rate Mortgage Option: ABC Bank offers a mortgage with a down payment of $100,000
(paid on the day of purchase of the apartment) and the balance financed by a 3.79% p.a. fixed interest
(compounded quarterly) mortgage with a term of 20 years with quarterly payments (first payment is
paid on the day of purchase of the apartment). Unfortunately, this fixed interest rate will last only two
years and then the rate will be variable for the remainder of the mortgage. ABC Bank estimates that the
variable rate will be 5.38% p.a. (compounded quarterly) at the beginning of year 3. For your calculation,
this variable rate is assumed to remain constant over the remaining life of the mortgage. Application fees
for this loan are $2,000, which must be paid in cash on the date of purchase.
Interest Only Option: ABC Bank also offers you an interest-only option. This option might be
interesting for those who want to have a greater flexibility with their cash flows. You will be paying only
interest for the first five years, after that, you will be paying interest and the principle for the remaining
25 years. You would make monthly payments over the full life of the loan. A down payment of $95,000
is to be paid on the day of purchase and the interest rate is fixed at 5% p.a. (compounded monthly).
Apr 28 2020 View more View Less
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