Paying Off A Mortgage

2) Answer the following questions:

a) How much loan would be paid off after 8 months?
Answer: $2050
b) How much will be repaid in total after 8 months?
Answer: $2000 x 8 = $16000
c) Hence, how much interest will be paid after 8 months?
Answer: $16000 - $2050 = $13950
d) How long will it take Deb to pay off the loan?
Answer: 299 months = 24.9 years
e) How much will Deb pay in total?
Answer: $596204
3) Explain why the principal repayment increases as time
goes by.
Answer: Principal repayment increases since there is
interest. The longer time it takes to repay the whole loan,
the more you have to pay since the interest also has to
be paid.
4) Suppose that after 10 years, Deb can afford to
increase her monthly repayments, and wishes to repay
$2500 per month. Enter 120 in cell E4 (since 120 months 10
years) and 2500 in cell E5. Scroll down, and you should
notice that the repayments increase to $2500 after 120
months.
(a) i) How long will it take to pay off the loan?

Answer: 241 months.

ii) How much will Deb have to pay in total?
Answer: $541674
(b) Repeat (a), if the increase in repayments takes place
after 2 years instead of 10 years.
(i) How long will it take to pay off the loan?
Answer: 189 months
(ii) How much will Deb have to pay in total?
Answer: $458359
5) Suppose after 15 years, Deb wins $10000 in the lottery,
and wishes to make a lump sum payment off the loan with
her winnings.
Remove the repayment change data in cells E4 and E5,
and enter 180 into cell F4, and 10000 into cell F5.
Scroll down, you should notice that the principal decreases
by $10000 after 180 months.
(a) i) How long will it take to repay the loan now?
Answer: 288 months.
ii) How much will Deb have to pay in total?
Answer: $584198
iii) How much will be saved by making the lump sum
payment?
Answer: $596204 - $584198 = $12006

(b) Repeat (a), if the lump sum payment is made after 5

years.
i)
How long will it take to repay the loan now?
Answer: 274 months
ii)

How much will Deb have to pay in total?

Answer: $557720
iii)

How will be saved in making the lump sum

payment?

Answer: $596204 - $557720 = $38484

2nd Answer: $584198 - $557720 = $26478
(c) Explain why the scenario in (b) results in a larger
saving.
Answer: This is because Deb paid the lump sum payment
after 5 years, whereas in (a), the lump sum payment is done
after 15 years and the longer it takes to repay the loan the
more the money to be paid. Meanwhile in 2), there is no
lump sum payment.
6)
(a) Suppose that, instead of $2000 payments, Deb wishes to
make payments so that the loan is paid off in 20 years.
i)

Based on your answer to 2(d), will the payments

need to be higher or lower than $2000?

Answer: The payments have to be higher than $2000.

ii)

Erase the lump sum payment data in cells F4 and

F5. Use trial and error on the repayment in cell B5 to

find the repayment such that the loan is paid off in

20 years.
Answer: 20 years = x months
1 year = 12 months
20 x 12 = 240 months
Deb has to pay $2155 to pay off the loan in 20 years.
iii)

How much will Deb have to pay in total?

Answer: $516433
(b) After 10 years, the interest rate increases by 0.25% to 8.65%
p.a. Enter 120 into cell G4, and 8.65% into G5.
i) How long will it take Deb to pay off the loan?
Answer: 311 months.
ii) How much will Deb have to pay in total?
Answer: $607152
c) Usually, when the interest rate rises, the monthly payment
increases accordingly such that the term of the loan
remains unchanged. Use trial and error method to find the
new repayments.
Answer: 24.9 years = 299 months
Monthly payment to be done in 299 months
So, monthly payment = $2025
Due to the interest rise, Deb has to pay $2025 per month
after 120 months since the interest raised after 120 months =
10 years.

d) By how much have the monthly repayments increased as

a result of interest rate rise?
Answer: The monthly payment has increases by $25 per
month.
7) Many banks offer honeymoon rates, whereby the
interest rate is very low initially, but increases after a short
while. In competition to a constant rate of 8.4% p.a.,
another bank offers Deb a honeymoon rate of 6.95%p.a. for
the first 12 months, and then 8.6% p.a. after that. Assuming
Deb takes 25 years to complete paying off her loan of
$250000, show manually the calculation using compound
interest formula that she will have to pay more money if she
borrows from the bank offering honeymoon rate.
Answer: I = 250000 x 1 x 6.95 / 100 = $17375
$250000 + $17375 = $267375
Compound Interest A = P (1 + i/100) n.
250000 ( 1 + 8.6/100)24
= $1 810 738.83 + 267375 = $ 2 078 113.83
More money paid = $ 2 078 113.83 - $596204
= $1 481 909.83