You have been tasked with incorporating interest rates that are linked to the SARB rates. This means
Question:
You have been tasked with incorporating interest rates that are linked to the SARB rates. This means that any changes to the repo rate will affect the interest rate used for a loan. Your client would like to have a uniform payment for the duration of the loan despite the anticipated changes in interest rates. Answer the following questions for a R150 000 5 year loan with an initial interest of 16% per annum:
1. What is the initial monthly payment, without factoring in future changes in interest, that would pay off the loan in the 5 years?
2. What would be the uniform monthly payment that takes into account a 25 basis point decrease every year?
3. What is the total interest paid for this loan using the uniform payment?
Your client would like to know how a flexible payment that entails a revision to the monthly payment with every interest rate change would look like.
4. What will be the monthly payment in the following years:
Year 2 : R Year 3: R Year 4 : R Year 5 :
5. What is the total interest paid using this changing payment method?