Question
a) You secured bank financing to purchase a $560,000 house using a 80% Loan to Value (LTV) ratio constant payment mortgage loan maturing in 35
a) You secured bank financing to purchase a $560,000 house using a 80% Loan to Value (LTV) ratio constant payment mortgage loan maturing in 35 years. The loan is fully amortising with a nominal annual interest rate of 3.58% and monthly payments. For repaying your loan early, at the end of year 4, the lender charged a break fee of 2.2%. Calculate the effective borrowing cost of this loan over the 4-year term.
b) You are buying a $990,000 house and need to borrow 95% of the value of the house (LTV). You can borrow this as a single loan for a term of 30 years. Alternatively, you can split your loan financing and borrow 80% LTV fully amortising loan at 3.25% annual interest maturing in 30 years and the remaining 15% LTV with a fully amortising loan at 13% annual interest maturing in 5 years. What rate should be offered in the single 95% LTV loan for the borrower to be indifferent between the two options (single vs split financing), assuming the house is sold after 5 years and loans repaid? All loans have monthly payments.
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