Added on to the initial amount of new mortgage

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Reference no: EM131957142

The median house price in Victoria was about $730 000 in April 2017. Suppose you wish to buy a house at this price and you have $80 000 as a down payment (this is an amount you pay immediately, leaving the remainder as the initial amount of the mortgage). You take out a mortgage for the remaining amount, at a 2.9% (Canadian) interest rate fixed for a 5 year term, with monthly payments. (a) Suppose the amortization period is 30 years. After 2 years, the bank gives you the option of taking out a new mortgage (on the amount remaining to be repaid) at only 2.6% fixed for 3 years, paying the same monthly rate as before, but in order to get out of your previous contract, you will have to pay a $3000 penalty, which will be added on to the initial amount of the new mortgage. Is it to your advantage to change, or should you remain with the original mortgage to the end of the 5 year term? Justify your answer. (Hint: think about how much remains to be paid at the end of the 5th year in each of the two scenarios.) (b) (Back to the initial mortgage.) Suppose you can only afford to make monthly payments of $1500 per month. What must the amortization period then be? How much remains to be paid after 5 years? Explain what is happening here.

Reference no: EM131957142

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