Question

Bill has bought a new home in Canberra. He borrowed $600 000 at a rate of 3.5% p.a., which is to be repaid in annual instalments over a thirty year period. The first instalment is due on 19 March 2020.

Like Bill, on the situation above, Scott has bought a house in Canberra, borrowing the same amount, and on the the same terms. Scott’s bank, however, offers an ‘interest offset’ account facility with the loan. Like Bill, Scott’s first payment is on 19 March 2020. On the day Scott takes the loan of $600 000 out (19 March 2019), Malcolm gives Scott $100 000. Scott immediately puts the money into his interest offset account. This account also earns 3.5% p.a. (compound interest). Over the term of the loan Scott does not put any more money into the interest offset account. The interest offset account pays interest annually, and its first payment will be on 19 March 2020. a. [6 marks] Draw a cash flow diagram, from Scott’s perspective, that describes the actions of his interest offset account. Scott’s interest offset account pays its interest payments to Scott’s loan. b. [4 marks]What is the amount of Scott’s total loan repayment on 19 March 2020? c. [10 marks] Show that Scott can make the total repayments calculated in part b for only 25 years, and that in the 26th year Scott will only pay $2 047.95 (plus the interest payment from his interest offset account) to extinguish his loan.

Answer 1

a.

b.

Scott's total repayment on 19 March 2020	32,622.80
From interest offset account	3,500.00
From Scott's personal account	29,122.80

c. The table below shows the loan repayment schedule for the next 26 years. At the 26th year, Scott will pay $2047.95 and Scott's interest offset account will fetch an interest of $3500. The outstanding principal will be $146,901.

	Princ	6,00,000.00
	Tenure	30
	Interest	3.5%
	EMI	32622.8
	Origination date	03-19
	Outstanding	600000
#	Year	Installment paid	Int paid	Prin paid	Out prin
1	12-00	32622.8	21000	11623	588377
2	12-01	32622.8	20593	12030	576348
3	12-02	32622.8	20172	12451	563897
4	12-03	32622.8	19736	12886	551011
5	12-04	32622.8	19285	13337	537673
6	12-05	32622.8	18819	13804	523869
7	12-06	32622.8	18335	14287	509582
8	12-07	32622.8	17835	14787	494794
9	12-08	32622.8	17318	15305	479489
10	12-09	32622.8	16782	15841	463648
11	12-10	32622.8	16228	16395	447253
12	12-11	32622.8	15654	16969	430284
13	12-12	32622.8	15060	17563	412721
14	12-13	32622.8	14445	18178	394544
15	12-14	32622.8	13809	18814	375730
16	12-15	32622.8	13151	19472	356258
17	12-16	32622.8	12469	20154	336104
18	12-17	32622.8	11764	20859	315245
19	12-18	32622.8	11034	21589	293656
20	12-19	32622.8	10278	22345	271311
21	12-20	32622.8	9496	23127	248184
22	12-21	32622.8	8686	23936	224248
23	12-22	32622.8	7849	24774	199474
24	12-23	32622.8	6982	25641	173832
25	12-24	32622.8	6084	26539	147294
26	12-25	5547.95	5155	393	146901