1. The Stepford family purchased a duplex in western Sydney four years ago for $395,000.
They paid a $15,000 deposit and financed the balance through a mortgage repayable over 25 years which required equal payments to be made at the end of each month. At that time there was an interest rate of 5.5% p.a. (APR) compounded monthly.
(a) What were the original mortgage payments?
Today the Stepford family has just been advised that the interest rate is to increase to 7.0% p.a. (APR) and that interest will be compounded daily. The family has been given the choice of two options to continue paying the mortgage.
Option 1: Make higher monthly payments for the remaining 21 years.
Option 2: Continue the same payments but extend the period of the loan.
(b) What is the amount of each new payment under Option 1?
(c) How long will it take to pay off the mortgage if Option 2 is taken?
(d) By how much has the annual effective rate of interest increased?
(e) Discuss what factors the family might need to take into account in deciding between taking Option 1 or Option 2.