Home Loan Problems Solution for Set 7 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.
P is the principal - this is the amount that Ronan needs to borrow from the Park National Bank.
How many payment periods there are is represented by N.
Since Ronan has a 7 % deposit, the principal P for the loan is actually the price of the flat minus this deposit amount:
[an error occurred while processing this directive]P = 230000 - 0.01 * 7 * 230000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $213900
We have a yearly interest rate, but we need the monthly interest rate, which we get by dividing by 12. The percentage rate needs to be divided by 100 to convert it to a decimal rate:
Monthly interest rate = 7.1 / 12 / 100
Monthly interest rate = 0.0059
We also need to calculate N, the total number of payments. The repayments happen every month. Ronan's loan runs for 15 years, so we can calculate how many months he'll be making payments for:
N = 12 * 15
N = 180
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0059 * 213900 / (1 - (1 + 0.0059)^(-180) )
A = $1934.56
So every month, Ronan will have to pay $1934.56 to the Park National Bank.