Question

You have just obtained a commercial mortgage for $4.375M with a 5-year term, 25-year amortization period and 4.25% mortgage interest rate. 1

(a) Construct an amortization table for the term of the loan assuming annual payments. What is the annual payment? What is the balance at maturity?

(b) What is the e§ective cost of borrowing if the borrower pays an origination fee of $30,000?

(c) The borrower can repay the balance of the loan at any time prior to its maturity, but must pay a penalty of 5% of the outstanding balance. What is the cost of borrowing if the borrower pays an origination fee of $30,000 and pays o§ the remaining balance of the loan after making payments for 4 years?

Answer 1

(a)	Loan Amount	4,375,000
	Interest Rate for a five-Year Term for 25 Year	4.25%
	Interest Rate for a Year	0.85%
	Amortization Period	25 Years
	Calculation of Annual Instalments
	Present Value of Loan (PVA)	4,375,000
	PVIFA (.85%,25)	22.4369
	Instalments=       PVA                                         PVIFA (.85%,25)	194,991.71

Amortization Schedule
Year (1)	Opening Amount (2)	Annual Instalment (3)	Interest (4) =2*R	Principal Payment (5) {3-4}	Closing Balance (6) {2-5}
1	4,375,000	194,992	37,188	157,804	4,217,196
2	4,217,196	194,992	35,846	159,146	4,058,050
3	4,058,050	194,992	34,493	160,498	3,897,552
4	3,897,552	194,992	33,129	161,863	3,735,689
5	3,735,689	194,992	31,753	163,238	3,572,451
6	3,572,451	194,992	30,366	164,626	3,407,825
7	3,407,825	194,992	28,967	166,025	3,241,800
8	3,241,800	194,992	27,555	167,436	3,074,364
9	3,074,364	194,992	26,132	168,860	2,905,504
10	2,905,504	194,992	24,697	170,295	2,735,209
11	2,735,209	194,992	23,249	171,742	2,563,467
12	2,563,467	194,992	21,789	173,202	2,390,264
13	2,390,264	194,992	20,317	174,674	2,215,590
14	2,215,590	194,992	18,833	176,159	2,039,431
15	2,039,431	194,992	17,335	177,657	1,861,774
16	1,861,774	194,992	15,825	179,167	1,682,608
17	1,682,608	194,992	14,302	180,690	1,501,918
18	1,501,918	194,992	12,766	182,225	1,319,693
19	1,319,693	194,992	11,217	183,774	1,135,918
20	1,135,918	194,992	9,655	185,336	950,582
21	950,582	194,992	8,080	186,912	763,670
22	763,670	194,992	6,491	188,501	575,170
23	575,170	194,992	4,889	190,103	385,067
24	385,067	194,992	3,273	191,719	193,348
25	193,348	194,992	1,643	193,348	0

(b)	Effective Cost of Borrowing
	Total Finance Charges including origination Fee(F)	529,793
	Number of Payments per year(N)	1
	Amount Repaid(A)	4,874,793
	Total Number of Payments(T)	25
	Effective Cost of Borrowing =2(F*N)/(A*(T+1))	2   X (529793x1)             4874793x (25+1)
		0.84%

(C)	Outstanding Balance at the end of the 4th Year	3,735,689
	Penalty to be charged	5%
	Amount of Penalty	186,784.47
	Interest up to 4 years	140,656
	Origination Fee	30,000
	Total Finance Charges	357,441
	Cost of Borrowing = Total Finance Charges           Loan Amount	357441        4375000
		8%