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?   

Savings account rate is 0.01% yearly.

I am struggling to find the information for question b and c it has to be a natwest fixed rate and variable rate mortgages if you could help me out with that it would be amazing and i would be very happy. Thank you

Answer 1

(A) Calculation of savings bank account:

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.

(B) House price = Deposit + (Monthly installments * period)

= 20000 + (1000*12*30)

= 380000

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

(C)

Fixed Rate Mortgage:

A fixed rate mortgage remains fix, that is, the rate does not change throughout the period of loan. The amount of principal and interest may change each month, but the total payment remains same. The main advantage is that the borrower is protected from the increase in interest rates. The main disadvantage is that qualifying for this type of loan may be difficult when the interest rates are high.

Variable Rate Mortgage:

Variable interest rate is set at below market rate as compared to fixed rate and then the variable rate keeps on increasing time to time. Variable rate mortgages have a fixed period of time during which the initail rate remains constant, and after that period it keeps on changing. The biggest advantage of variable rate is that it is cheaper than a fixed rate mortgage for some years. It is also attractive because the initial lower payments attracts borrowers to qualify for larger loan amount. The main disadvantage is that the monthly payments keeps on changing frequently and in case of larger loan, the interest burden increases drastically.

Below points to be kept in mind while selecting mortgage deals:

- We need to consider the personal factors and balance them with the economic realities.

- Affordability of mortgage payment needs to be considered. That is, if the interest rate increases in case of variable mortgage then can we afford to pay interest on increased rate.

- Can we anicipate the changes in interest rates, that is whether it will increase or decrease in future.

Considering above points, Fixed interest mortgage would be most suitable for risk averse debtors.