Question

Jane Ericsson has just purchased a 62 square-meter down-town flat at NOK 3,500,000 financed with

20% of her own capital. Financing the rest of the purchase, a 20-year NOK 2,800,000 ordinary annuity

mortgage at 3.15% per year species end-of-month payments of interest including principal over the amortization period.

The rest payment is due one month from today. A two percent initiation fee charged by the lender requires Jane to increase her equity contribution by NOK 56,000.

It is commonly expected that down-town ats in Jane's neighborhood will appreciate by 2 percent per year over the next ten years.

Please provide numerical answers to the questions below:

(a) (7 points) Which monthly payment will amortize the mortgage-loan over the 20-year term?

(b) (7 points) What effective yield is Jane paying on the mortgage over the 20-year term?

Assume that Jane wants a 50% equity-share in her at after exactly 10 years (ie. 120 monthly payments).

Towards that end, she has received the lender's approval to adjust her monthly payment of interest and

principal.

(c) (8 points) Which monthly payment accommodates a 50% ownership in the at after 10 years?

(d) (8 points) Given the monthly payment calculated in (c), how many years does it take until

the loan is fully amortized (paid-down)?

Answer 1

Soln : a) Rate = 3.15% per annum = 3.15/12, r =0.26%= loan rate, Principal = NOK 2800000, term T = 20 years = 240 months

To calculate EMI , use PMT in excel = PMT(r,T, -P, F) = PMT(0.26%, 240, - 2800000,0) = NOK 15697.50

b) As we can see here initiation fee = 2% = 56000 , So, we can say that Principal = 2800000

We should convert the 56000 in series of 240 payments using 56000*(A/P,0.26%,240) = 56000*0.0056 = 313.95

Total payment monthly = EMI + 313.95 = 16011.42

Now, effective rate = rate (240,16011.42,-2800000,0) = 0.278%

Yearly rate = 0.278*12 = 3.34%

c) Nw, as Jane wants to raise its share to 50% after 10 years, that means, she would like to pay principal amount of 3500000/2 -20% of 3500000 = 1050000

So, to calculate the PMT, r = 0.26%, principal = 1050000 and term t = 120 months

PMT (0.26%, 120, -1050000,0) = NOK10197

d) Now remaining balance is to be paid in next years to come Let t be the months in which full amount to be paid , SO again using excel we can get , t = (0.26%,10197.14,-(2800000-1050000),0) = 228 months (approx.) = 19 years when it will take to pay the amount fully further.