Question

Assume you have just taken out a new home mortgage. You will borrow $200,000 and make equal annual payments for 20 years. a. If the interest rate is 10% per year, how much will the payments be if you pay interest on the unpaid balance each year? b. Construct an amortization schedule for the first two years. (There should be 5 columns: end of year, Payment, interest, principal repayment, balance; remember, you borrow today, the end or year 0) c. If you are in the 30% marginal tax bracket, what will the net cash flow after tax to service this loan in the first year? (Think of yourself and your home mortgage and your income tax return) d. Does the net cash flow after tax needed to service this loan get larger or smaller in future time periods?

Answer 1

(a)

The Payment for each year will be $ 23,491.92, if the interest is paid on unpaid balance each year

(b)

The Amortization schedule is prepared for complete 20 years

Statement Showing Amortization Schedule for New Home loan Mortgage for 20 Years @ 10% Interest Rate per year:-

(Amount in $)

End of Year	Payment	Interest	Principal Repayment	Balance
0				2,00,000.00
1	23,491.92	20,000.00	3,491.92	1,96,508.08
2	23,491.92	19,650.81	3,841.11	1,92,666.97
3	23,491.92	19,266.70	4,225.22	1,88,441.75
4	23,491.92	18,844.18	4,647.74	1,83,794.01
5	23,491.92	18,379.40	5,112.52	1,78,681.49
6	23,491.92	17,868.15	5,623.77	1,73,057.72
7	23,491.92	17,305.77	6,186.15	1,66,871.57
8	23,491.92	16,687.16	6,804.76	1,60,066.81
9	23,491.92	16,006.68	7,485.24	1,52,581.57
10	23,491.92	15,258.16	8,233.76	1,44,347.81
11	23,491.92	14,434.78	9,057.14	1,35,290.67
12	23,491.92	13,529.07	9,962.85	1,25,327.82
13	23,491.92	12,532.78	10,959.14	1,14,368.68
14	23,491.92	11,436.87	12,055.05	1,02,313.63
15	23,491.92	10,231.36	13,260.56	89,053.07
16	23,491.92	8,905.31	14,586.61	74,466.46
17	23,491.92	7,446.65	16,045.27	58,421.19
18	23,491.92	5,842.12	17,649.80	40,771.39
19	23,491.92	4,077.14	19,414.78	21,356.61
20	23,491.27	2,135.66	21,356.61	0.00
Total	4,69,838.75	2,69,838.75	2,00,000

(c)

The Net Cash Flow after tax should be atleast $23,491.92 to service this loan in the first year.

(d)

As the loan is paid in the equal annual instalments for 20 years, so the Payment remains equal for 20 years. So to service this loan the Net Cash Flow after tax can be larger or equal, but it cannot be smaller in future time.