Question

1. A 2 bedroom condo unit in Ortigas is pre-selling for P3.4M. The total down payment is 15% and the remaining amount is to be paid via bank financing There are two options for bank financing: a. Option A-starts at 5% interest rate annually for 10 years. However, the interest is re-evaluated at the end of the 5th year. Historically a rate that starts at 5% becomes 10% at the start of the 6th year until the end of the term. b. Option B - a fixed 7.5% per annum interest rate is applied on the loan payable in 10 years a. how much is the down payment and how much is the loan? (5) b. how much is the remaining principal in each option at the end of year 12 (5) c. what is the effective interest rate of each option? (5) d. what is the better option for the buyer? Justify. (3)

hope you can help

Answer 1

a) Down payment is 15% of Value which is 3.4M @15% = 0.51 M and balance is loan amount 2.89M

b) As per Option "A" principle value at the end of the year 1 is 2661475 and as per Option "B" principle value at the end of year 1 is 2688251

c) Effective interest rate under Option"A" is 6.14% and under Option "B" is 7.50%

d) Under Option "A" total outflow is 3909897 where as under Option "'B" total outflow is 4116577. Hence Option "A" is having less outflow which is better option for the buyer