Home Loan Problems Solution for Set 6 Question 5
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Solution to Question 5
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 as a decimal, not a percentage, for the period of time at which payments are made.
The amount that Yandel needs to borrow from the First Commercial Bank is the principal P.
How many payment periods there are is represented by N.
Because the deposit it 30 %, Yandel's principal amount will be the cost of the three bedroom flat less this deposit amount:
[an error occurred while processing this directive]P = 300000 - 0.01 * 30 * 300000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $210000
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. The percentage rate needs to be divided by 100 to convert it to a decimal rate:
Monthly interest rate = 9.7 / 12 / 100
Monthly interest rate = 0.0081
We also need to calculate N, the total number of payments. The repayments happen every month. Yandel's loan runs for 25 years, so we can calculate how many months he'll be making payments for:
N = 12 * 25
N = 300
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0081 * 210000 / (1 - (1 + 0.0081)^(-300) )
A = $1864.04
Finally the solution: every month, Yandel is going to have to fork out $1864.04 to the First Commercial Bank to pay off his loan.