A. In discussions with your bank manager, you have been offered a 20 year mortgage with...

A. In discussions with your bank manager, you have been offered a 20 year mortgage with interest rates fixed for the next 5 years at 4.5% (when the rates will be reset), or an alternative of a mortgage with interest rates fixed over the whole term of the mortgage at a rate of 5.5%. Explain why you might not want to take advantage of the lower rates on the 5 year fixed option

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Expert Solution

From risk management point of view it is better to have fixed cash flows for amortization as the period is very long.

The images below show interest payment for amortization for 5.5% fixed for 20 years and 4.5% fixed for 5 years and interesting at 0.5% each year afterwards.

Even interest paid is more for floating rate

jeff jeffy answered 1 year ago

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