Question

Many Australian home loans that are interest-only actually require payments to be made on a fully amortising basis after a number of years.

You decide to borrow $800,000 from the bank at an interest rate of 3.6% pa for 25 years. The payments will be interest-only for the first 5 years, than they will have to be paid on a fully amortising basis for the remainder of the loan term. Note that the remaining loan term will be only 20 years. Assume that interest rates will remain constant.

Which of the following statements is NOT correct?

Select one:

a. The 1^st monthly loan payment will be $2,400. The interest component will be $2,400 and the capital component will be zero.

b. The 60^th monthly loan payment will be $2,400. The interest component will be $2,400 and the capital component will be zero.

c. Just after the 60^th monthly loan payment, the home loan principal will be $800,000.

d. The 61^st monthly loan payment will be $4,680.89. The interest component will be $2,400 and the capital component will be $ 2,280.89.

e. The 300^th monthly loan payment will be $4,680.89. The interest component will be zero and the capital component will be $4,680.89. Just after the 300^th monthly loan payment, the home loan principal will be zero and the loan is paid off.

Answer 1

Given interest rate per annum = 3.6%

Per month = 3.6% / 12 = 0.3%

So monthly interest payments for first 60 months =

800,000*0.3% = 2400

There will be no capital payments for first 60 months

Given statements in option a and b are correct

After the 60th monthly payment loan will still be 800,000 because of no repayment of principal for first 60 months

Option c statement is correct

Calculation of monthly payments:

Using excel PMT Function

=PMT(0.3%,240,800000,0)

Monthly payments = 4680.89

Interest for 61st month = 800,000*0.3% = 2400

So principal = 4680.89 - 2400 = $2280.89

Option d statement also correct

There will always be interest and principal portions mixed in monthly payments of 4680.89 from 61st payment to 300th payment so the statement saying that in 300th monthly payment interest portion will be zero is incorrect.though after 300th payment loan balance is zero is correct.

option e is correct answer