Answer Happy

An individual intends to take out a mortgage of £300,000 to purchase a new house. The mortgage is to be repaid by level instalments payable monthly in arrears over 25 years. Bank A will use an effective rate of interest of 4.5% per annum. Calculate the amount of the monthly repayment in this case. (i) On the day of purchase, the following costs will also be incurred: . a property survey fee of £500 a mortgage set-up fee of £250 legal fees of £1,000, and • stamp duty of 3% of the purchase price (in excess of £100,000) Bank B will pay all of these initial costs on behalf of the individual, but will also charge a higher effective interest rate of 4.75% per annum. (ii) Calculate the amount of the monthly repayment in this case. (iv) [3] (iii) If the individual has no savings at the date of purchase and, thus, would have to borrow addition funds to cover these initial costs, explain why borrowing from Bank B is likely to be the more cost-effective option. [5] [2] Hint: You may find the Solver function in Excel useful here, but you should also fully explain your working. Marks will be deducted if this is not done clearly. However, if the individual has savings to cover these initial costs, use Excel (or other similar software) to calculate the rate of return that must be earned over the 25-year repayment period on the monthly saving (between the repayment to Bank B and that to Bank A) such that it becomes more cost-effective to pay the costs from the savings and borrow the £300,000 purchase price from Bank A. [4] Alternatively, the individual could rent the same property for £1,350 per month payable monthly in arrears. (v) Briefly explain why it is appropriate that the monthly rent on the property is less than the monthly mortgage repayments calculated in (i) and (ii) above. [2]