Question

Your employer has just transferred you to beautiful Winnipeg. Since you anticipate being at the branch here for some time, you have decided to purchase a condo downtown. The condo you want to purchase is being listed at $385,000. The mortgage officer at your financial institution has informed you that the current rate on mortgages is 4.80%, compounded semi‐annually. Fortunately, you are a prudent saver and have managed to amass the 10% down payment in your savings account. You have decided to take the mortgage on an 18‐year amortization period hoping that this will keep the every second week (26 payments/year) payments manageable.

1. What is your bi-weekly (every second week) interest rate for this mortgage? (1 mark)

2. What is the bi‐weekly payment for this mortgage

           

3. What is the effective per annum interest rate that you are paying on this mortgage? (1 mark)

4. How much of your first payment will be principal?

5. If your employer moves you again in 4 years and you must sell your condo, how much principal do you still owe the bank?

Answer 1

(a) Biweekly interest rate= 0.182601% calculated as follows:

Part (b):

Total number of payments= 18 years*26= 468

Cost of the condo= $385,000

Down payment rate= 10%

Therefore, loan amount after down payment= $385,000*(1-10%)= $346,500

Biweekly payment is $1,101.90 calculated using PMT function of Excel as follows:

Part (c)

Effective interest rate= [(1+0.182601%)^26]-1 = 4.8576%

Part (d)

Beginning balance (Mortgage amount)= $346,500

Biweekly interest rate= 0.182601%

Interest for the first period= $346,500*0.182601% = $632.71

Biweekly payment= $1,101.90

Principal component of first payment= $1,101.90-$632.71=$469.19

Part (e)

Number payments made in 4 years= 4*26= 104

Principal owed after 4 years= $292,817.75 as shown in the amortization schedule below: