Use the information below to answer the following question. You have cash on han

Question

Use the information below to answer the following question. You have cash on hand Property value $400,000 Down payment is $120.000 (i.c. LVR is 70%) Loan #1 - $200,000 Loan #2 - $80,000 Interest rate (nominal) for Loan #1 is 8.40% per annum compounded semi-annually Interest rate for Loan #2 is 9% per annum compounded semi-annually Processing fees is $2,500 No cancellation penalty Mortgage payment paid annually Term of loan 12 years What is the effective cost of borrowing (ECB)? 8.89% 8.93% 8.70% 8.78% None of the above

Explanation / Answer

Loan Amount = 500000*70% = 350000

Processing Fee = 2.5%*350000 = 8750

Loan amount outstanding = 358750

Effective Annual Interest Rate = (1+7.5%/2)^2 -1 = 7.641%

Annual Payment of Mortgage = pmt(rate,nper,pv,fv)

Annual Payment of Mortgage = pmt(7.641%,15,-358750,0)

Annual Payment of Mortgage = $ 40,998.37

Effective anuual cost of borrowing = rate(nper,pmt,pv,fv)

Effective anuual cost of borrowing = rate(15,40998.37,-350000,0)

Effective anuual cost of borrowing = 8.043 %

Answer

C) 8.05%

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