Home Loan Problems Solution for Set 10 Question 3
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Solution to Question 3
For this type of question, you need this following equation:
A = i * P / (1 - (1 + i)^(-N) )
A is the payment Amount each month.
i is the interest rate expressed as a decimal (NOT A PERCENTAGE!), for the period of time over which payments are made.
P is the principal - this is the amount that Erick needs to borrow from the Johnson Bank.
How many payment periods there are is represented by N.
Since Erick has a 26 % deposit, the principal P for the loan is actually the price of the two bedroom flat minus this deposit amount:
[an error occurred while processing this directive]P = 380000 - 0.01 * 26 * 380000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $281200
We need to convert the yearly interest rate into something we can use in this question - we need a monthly interest rate, so we need to divide by 12. We also need to divide the percentage rate by 100 to turn it into a decimal rate:
Monthly interest rate = 4.3 / 12 / 100
Monthly interest rate = 0.0036
We also need to calculate N, the total number of payments. Since payments occur every month, and Erick has a 15 year loan:
N = 12 * 15
N = 180
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0036 * 281200 / (1 - (1 + 0.0036)^(-180) )
A = $2122.54
So every month, Erick will have to pay $2122.54 to the Johnson Bank.