Personal Financial Planning - Credit

In-Class Assignment 2 (15%)

You are a financial planner with a specialty in credit. You began your career working for a bank
and are now a self-employed financial planner.

Last week, a couple walked into your office looking for advice. Peter and Mary bought a home
in Burlington, Ontario, 5-years ago. At the end of the month, December 31, 2021, their
mortgage will be up for renewal. They are not sure what is going to happen to interest rates and
want to know the current 4-year and 5-year rates and how they will impact them.

One of the financial institutions you represent is currently offering clients fixed-rate mortgages.
The current rates for a fixed mortgage are: 3.3% for a 4-year closed term and 3.5% for a 5-year
closed term.

Peter and Mary provided you with the following information:

• Purchase price of their home: $1,00,000.00

• Market value of their home: $1,300,000.00
• Original Mortgage: $750,000.00
• Mortgage amortization: 25 years
• Mortgage term: 5 years, fixed rate compounding semi-annually
• Mortgage Rate: 2.75%
• Payment Schedule: Monthly

Using the above information above, answer the following questions:

1. Calculate the balance outstanding on Peter and Mary’s mortgage at the end of the 5year
term (balance as of Dec. 31, 2021)?

2. If Peter and Mary select the 4-year term, what is the balance outstanding at the end of the
4 years? (5 marks)

3. If Peter and Mary select the 5-year term, what will their monthly payments be? (5 marks)

4. Assuming they take the 5-year mortgage rate, how much interest will they have paid over
the 10 years? (5 marks)
1. PV = $750,000 N = 300 I = 2.75% P/Y = 12

PMT = $3,453.84

For outstanding balance after the 5 years with the interest rate of 2.75 is:

N = 300 I = 2,75% PMT = $3,453.84 P/Y = 12

BAL = $637, 952

2. PV = $637,952 N = 240 I = 3,3% C/Y = 2 P/Y = 12

PMT = $3627.35

For the balance outstanding at the end of the 4-year term:

PMT = $3,637.35 N (240 – 48) = 192 I = 3,3% C/Y = 2 P/Y = 12

BAL = $541,416.67

3. PV = $637,952 N = 240 I = 3,5% C/Y = 2 P/Y = 12

If their select the 5-year term, they will have monthly payments of:

PMT = $3,691.59.
 4.

 For the first 5 years with an interest rate of 2,75%:

$3,453.84 x 60 = $207,300

$750,000 - $637,952 = $112,048

$207,230 - $112,048 = $95,182

 For the second 5 years with an interest rate of 3.5%:

$3,691.59 x 60 = $221.495

$637,952 - $517,287.94 = $120,665

$221,495 – 120,665 = $100,830

 After 10 years, the interest paid by them is:

$100,830 + $95,182 = $196,012

Maria Patino
ID Student 101352145

© 2022 Giulio Iacobelli