Question

Choose one financial institution (e.g. Bank of Lloyds, TSB, etc.) and collect the details of one of their savings accounts and one of their fixed rate and variable rates mortgages (you can either visit one branch of your chosen financial institution or collect the information, if available, on the financial institution website). You should attach to your submission the details of the savings account and the mortgages.

1. Assuming that you deposit £15,000 today, how much money will you have in this savings account in 15 years?                                                                                
2. Your friend John is considering buying a house. He has a £20,000 deposit and he will ask for a mortgage which he intends to repay with monthly payments of £1,000 for 30 years. Which house price can John afford?                                               

Compare fixed rate with variable rate mortgage deals. Which type of deal is more likely to be chosen by a more risk-averse debtor? Why?                   

Answer 1

Answer A:

Yearly Interest = 0.01% = Balance*0.01%

Year	Balance	Interest @ 0.01%
1	15000.00	1.50
2	15001.50	1.50
3	15003.00	1.50
4	15004.50	1.50
5	15006.00	1.50
6	15007.50	1.50
7	15009.00	1.50
8	15010.50	1.50
9	15012.00	1.50
10	15013.51	1.50
11	15015.01	1.50
12	15016.51	1.50
13	15018.01	1.50
14	15019.51	1.50
15	15021.01	1.50
16	15022.52

After 15 years, we will have 15022.52 in savings bank account.

Answer B:

House price = Deposit + (Monthly installments * period)

= 20000 + (1000*12*30)

= 380000

So, the cost of house that John can afford is 380000

Answer C:

Fixed Rate Mortgage:

A fixed rate mortgage remains fix, that is, the speed doesn't modification throughout the amount of loan. the quantity of principal and interest might modification monthly, however the whole payment remains same. the most advantage is that the recipient is shielded from the rise in interest rates. the most disadvantage is that qualifying for this sort of loan could also be tough once the interest rates ar high.

Variable Rate Mortgage:

Variable charge per unit is ready at below market rate as compared to fastened rate then the variable rate keeps on increasing time to time. Variable rate mortgages have a hard and fast amount of your time throughout that the initail rate remains constant, and then amount it keeps on ever-changing. the largest advantage of variable rate is that it's cheaper than a hard and fast rate mortgage for a few years. it's conjointly engaging as a result of the initial lower payments attracts borrowers to qualify for larger loan quantity. the most disadvantage is that the monthly payments keeps on ever-changing often and just in case of larger loan, the interest burden will increase drastically.

Below points to be unbroken in mind whereas choosing mortgage deals:

- we'd like to think about the private factors and balance them with the economic realities.

- Affordability of mortgage payment has to be thought-about. That is, if the charge per unit will increase just in case of variable mortgage then will we have a tendency to afford to pay interest on accrued rate.

- will we have a tendency to anicipate the changes in interest rates, that's whether or not it'll increase or decrease in future.

Considering higher than points, fastened interest mortgage would be best suited for risk disinclined debtors.

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