Question

5. A couple purchas ed a house and signed a mortgage contract for $350 000 to be paid in installments over 25 year at 3.5%. The contract stipulates that after 5 years the mortgage will be renegotiated at a new prevailing rate of interest. Calculate: (a) Monthly payment for initial 5 years; (b) The outstanding principal after 5 years: (c) The new payment (now every second week) after 5 years at 4.2%. NOTE: mortgages rates in Canada are always compounded twice a year

Answer 1

Value of mortgage contract = $350,000

Interest rate for the first 5 years = 3.5%

Payment method for the first five years = Monthly payment

Calculation of monthly payment for the first 5 years:

Monthly payment (Mp) = (contract value * interest rate)/ 12 months

= ($350,000 * 3.5%)/ 12

= $1,020.833

Calculation of outstanding principle after 5 years:

Principle repaid = 5 years * monthly payment * 12 months

= 5 * $1,020.833 * 12 = $61,250

Outstanding principle = Total amount - amount repaid = $350,000 - $61,250 = $288,750

Calculation of new payment (for every second week) at 4.2%:

Outstanding principle = $288,750

interest rate = 4.2%

payment method = every second weeks

New payment = (outstanding principle * interest rate * 2 weeks)/ 52 weeks

= ($288,750 * 4.2% * 2)/ 52

= $466.442