Question

You've just been appointed senior mortgage loan officer at the Wawa (Ontario) branch of Royal bank. Ms.K. Wynne who is a potential mortgager, comes to you seeking a $750,000 fixed-rate mortgage loan, to be originated today, in order to purchase a local home currently listed for $1,000,000.00. Based on her credit record and this collateral, you offer her an announced annual mortgage rate of T=5%, fixed ver the life of the loan, with a renewable maturity of five years and a n amortization period of twenty-five years. She would consider an interest-only mortgage or a constant coupon payment mortgage which has a zero balance at the end of twenty-five years. Prior to deciding, she asks you to show her a sample of the respective monthly interest and amortization portions of the coupon payment, as well as the total monthly coupon payment itself, for each of the two types of mortgage she would consider. She also wants to know the initial balance of each morgage if she could renew it on the same terms after her 60th coupon payment (that is, her first coupon payment on the renewed mortgage would occur sixty-one months from today, once she has paid all required coupon payments at the end of the fifth year of the maturities.) Assuming the sample payments she wishes to see are those she would pay in the thirtieth month of her mortgage, calculate the interest, amortization and total coupon payments owed in the thirtieth and sixtieth months of the mortgage, for the two alternative types of amortization she wants to consider:

a.) the mortgage with renewable five year maturity periods and an interest-only amortization schedule over twenty-five years.

b.) the mortgage with renewable five year maturity periods and a constant payment amortization schedule over twenty five years.

Answer 1

A) For fixed principal amortization ( $2500^300) and only interest on balance amount amortisation

At 30 months principal $2500 Interest 2812.50 TOTAL 5312.50 ( principal balance 675000)

At 60 months principal $2500 Interest 2500 TOTAL 5000 (principal balance 600000)

B) AT 30 months principal 1157 interest $2870 total 4027 ( constant monthly payment)

At 60 months principal 1157 interest 2870 total 4027 ( constant monthly payment)

Essentially for option A you start off high at $3125+2500 and end off at alow of just $2500 whereas in the second one a fixed payment of $4027 through out