Home Loan Problems Solution for Set 9 Question 10
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Solution to Question 10
The equation you need to use is as follows:
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 Alexzander needs to borrow from the Provident Bank is the principal P.
N is the number of payment periods.
Since Alexzander has a 11 % deposit, the principal P for the loan is actually the price of the one bedroom unit minus this deposit amount:
[an error occurred while processing this directive]P = 170000 - 0.01 * 11 * 170000 (we need the 0.01 to convert the deposit percentage into a decimal)
P = $151300
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 = 4.6 / 12 / 100
Monthly interest rate = 0.0038
We also need to calculate N, the total number of payments. Since payments occur every month, and Alexzander has a 20 year loan:
N = 12 * 20
N = 240
Armed with this information we can now fill in the numbers and then calculate the answer:
A = 0.0038 * 151300 / (1 - (1 + 0.0038)^(-240) )
A = $965.39
So every month, Alexzander will have to pay $965.39 to the Provident Bank.