A couple is deciding whether to purchase a new home. Calvin is a software engineer, making $119,963, and Areka is an imaging radiologist, making $14
A couple is deciding whether to purchase a new home. Calvin is a software engineer, making $119,963, and Areka is an imaging radiologist, making $143,073. (Talent,2022). The couple presently has $200,000, and they have budget of $850,000. They will therefore require an additional $650,000 to attain their optimum budget.
This investigation's goal is to assist a couple in identifying the most efficient strategy to reduce their 30-year loan's interest costs. To achieve this, the minimum monthly payback from the bank with the lowest comparison rate will be considered when the loan is paid monthly. In this study, my methods will include raising monthly payments, shortening the loan's length, upping payment frequency, and making lump sum payments. To show how it can considerably affect the overall interest paid on the house load, the analysis will also include a scenario when the couple would experience financial difficulties and be unable to determine the minimum monthly payments. However, the assumptions and limitations that will need to be considered will have an impact on the reasonableness of the tactics and the overall interest saved.
Figure 1: Chosen house (realestate.com)
The house is priced is $770,000, with 4 roomy bedrooms, 2 bathrooms, and a garage that can fit two cars. This hillcrest home is typical for a young professional couple who are considering starting a family in the future.
Table 1: Loan information
Purchase price $770,000Deposit 20% of $770,000770,000 0.2 =154,00020% deposit of $154,000Fees (Stamp Duty) For a $770,000 home, a stamp duty fee of $21,330 plus $5.50 for every $100 over $500,000 is required
How many $100s over $500,000: ($770,000 -$500,000) $100 = 2700Therefore, $5.502700 = $14,850Total stamp duty =$21,330 + $14,850=$36,180Total savings required (deposit + Fees) Total savings required = deposit + fees=$154,000 + $36,180=$190,180Total Loan Amount (House price Deposit) Total loan amount = house price deposit = $770,000 - $154,000 = $616,000The following table below will compare the interest rates of 4 different banks and show the calculations to find the total interest paid in each example. The information below will then be used to find which bank will be taken out the loan with.
Table 2: Initial loan information
BankSACommonwealth ANZ Westpac
Loan information 30-year loan
2.89%pa variable
Interest rate
Compounded monthly 30-year loan
4.55%pa variable interest rate
Compounded monthly 30-year loan
4.39%pa variable interest rate
Compounded monthly 30-year loan
2.79%pa variable interest rate
Compounded monthly
Loan fees Establish fee: $500
Ongoing fee: $15/month Establish fee: $600
Ongoing fee: $10/month Establish fee: $600
Ongoing fee: $15/month Establish fee: $500
Ongoing fee: $10/month
Minimum monthly repayments N = 3012 = 360I=2.89PV = $616,000+500PMT =?FV = 0P/Y = 12C/Y = 12PMT = -2562.77However, there is a $15 monthly service fee
Minimum monthly repayments are $2575.77N = 30 12 = 360 I=4.55%PV= $616,000 + $600PMT =?FV = 0P/Y = 12C/Y = 12PMT = -3142.57However, there is a $10 monthly service fee
Minimum monthly repayments are $3152.57N = 30 12 = 360I=4.39%PV = $616,000+600PMT =?FV = 0P/Y = 12C/Y = 12PMT = -3084.05However, there is a $15 monthly service fee
Minimum monthly repayments are $3099.05N = 30 12 = 360I=2.79%PV = $616,000+500PMT =?FV = 0P/Y = 12C/Y = 12PMT = -2529.88However, there is a $10 monthly service fee
Minimum monthly repayments are $2539.88Comparison rates N = 30 12 = 360PV = $616,000PMT =-$2575.77FV = 0P/Y = 12C/Y = 12I% = 2.94% p.a.N = 30 12 = 360PV = $616,000PMT =-$3152.57FV = 0P/Y = 12C/Y = 12I% = 4.59% p.a.N = 30 12 = 360PV = $616,000PMT =-$3099.05FV = 0P/Y = 12C/Y = 12I% = 4.44% p.a.N = 30 12 = 360PV = $616,000PMT =-$2539.88FV = 0P/Y = 12C/Y = 12I% = 2.83% p.a. Total repayments Total PMT:
= ($2575.77 30 12)=$927,277.20Total repayment is $927,277.20Total PMT:
= ($3152.57 30 12)= $1,134,925.20Total repayment is $1,134,925.20Total PMT:
= ($3099.05 30 12)= $1,115,658Total repayment is $1,115,658Total PMT:
= $2539.88 30 12)= $914,356.80Total repayment is $914,356.80Total interest paid Total interest paid:
= $927,277.20- $616,000= $311,277.20Total interest paid:
= $1,134,925.20- $616,000=$518,925.20Total interest paid:
= $1,115,658 - $616,000=$499,658Total interest paid:
= $914,356.80- $616,000=$298,356.80The table above shows that Westpac would be the best option due to having the lowest variable interest rate at 2.79% p.a. The couple will save $220,568.40 by choosing Westpac over Commonwealth Bank when compared to the total interest paid on the Commonwealth Bank loan. Therefore, as Westpac offers the lowest interest rate and will consequently cost the least over the course of the loan, doing so is ideal for the pair.
Change 1: Increasing Monthly Repayments
The following table will compare the total repayments and total interest paid on the loan with increasing monthly repayments
Table 3: increasing the monthly repayments with certain values
Original monthly repayments Increase $1000 Increase $2000 Double monthly repayments
Info about loan 30-year loan
2.79%pa variable interest rate
Compounded monthly 30-year loan
2.79%pa variable interest rate
Compounded monthly 30-year loan
2.79%pa variable interest rate
Compounded monthly 30-year loan
2.79%pa variable interest rate
Compounded monthly
Monthly repayments and new duration of loan N = 30 12 = 360I=2.79%PV = $616,000PMT =-2539.88FV = 0P/Y = 12C/Y = 12N=360 monthsDuration = 30 years
N = ?I=2.79PV = $616,000PMT = -3539.88FV = 0P/Y = 12C/Y = 12N=223.27 monthsDuration = 19 years
N = ?I=2.79PV = $616,000PMT = -4539.88FV = 0P/Y = 12C/Y = 12N=163.21 monthsDuration = 14 years
N = ?I=2.79%PV = $616,000PMT = -5079.76FV = 0P/Y = 12C/Y = 12N=142.62Duration = 12 years
Total repayments Total PMT:
=nPMT=3602539.88=$914,356.80Total PMT:
=nPMT=223.273539.88=$790,349.01Total PMT:
=nPMT=163.214539.88=$740,953.81Total PMT:
=nPMT=142.625079.76=$724,475.37Interest saved Total interest paid:
= $914,356.80- $790,349.01=$124,007.79Total interest paid:
= $914,356.80- $740,953.81=$173,402.99Total interest paid:
= $914,356.80- $724,475.37=$189,881.43According to the following table, raising monthly payments significantly reduces the overall amount of interest paid in every situation. Unsurprisingly, doubling the repayments results in a total interest savings of $189,881.43, which is the highest. By doubling payments, the loan's term is shortened by 18 years, saving the borrower a sizable sum of money. The couple also has the option of increasing the monthly payments by $1,000, which would still result in a savings of $124,007.79 over the course of the loan and 11 years.
Change 2: Reducing the Term of Loan
The following table below will compare the total interest paid on the loan by reducing the term of the loan by every 5 years
Table 4: Reducing the term of loan with certain values
Original monthly repayments Reduce term of loan by 5 years Reduce term of loan by 10 years Reduce term of loan by 15 years
Info about loan 30-year loan
2.79%pa variable interest rate
Compounded monthly 25-year loan
2.79%pa variable interest rate
Compounded monthly 20-year loan
2.79%pa variable interest rate
Compounded monthly 15-year loan
2.79%pa variable interest rate
Compounded monthly
Monthly repayments N = 3012 = 360I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -2539.88N = 2512 = 300I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -2854.30N = 20 12 = 240I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -3351.93N = 15 12 = 180I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -4192.04Total repayments Total PMT:
=($2539.88 30 12)= $856,573.20Total repayment is $914,356.80Total PMT:
=($2854.30 25 12)= $856,290Total repayment is $856,290Total PMT:
=($3351.93 20 12)= $804,458.40Total repayment is $804,458.40Total PMT:
=($4192.04 15 12)= $754,567.20Total repayment is $754,567.20Total savings Total interest paid:
= $914,356.80- $616,000=$298,356.80Total interest paid:
= $856,290- $616,000=$240,290Total interest paid:
= $804,458.40- $616,000=$188,458.40Total interest paid:
= $754,567.20- $616,000=$138,567.20Change 3: Increasing the Frequency of Payments
The following table will compare the interest paid on the loan when the payment frequency is increased from monthly to weekly, to quarterly and to yearly.
Table 5: Increasing repayment frequency
Original monthly repayments Quarterly payments Yearly payments Weekly payments
Info about loan 30-year loan
2.79%pa variable interest rate
Compounded monthly 30-year loan
2.79%pa variable interest rate
Compounded quarterly 30-year loan
2.79%pa variable interest rate
Compounded yearly 30-year loan
2.79%pa variable interest rate
Compounded weekly
Monthly repayments N = 30 12 = 360I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -2539.88=$2539.88N = 30 4 = 120I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -5888.62=$5888.62N = 30 1 = 30I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -21,281.61=$21,281.61N = 30 52 = 1560I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -1,471.50=$1,471.50Total repayments Total PMT:
=nPMT=3602539.88 Total repayment is $914,356.80Total PMT:
=nPMT= 1205888.62 Total repayment is $706,634.40Total PMT:
=nPMT= 3021,281.61 Total repayment is $638,448.30Total PMT:
=nPMT= 15601,471.50 Total repayment is $2,295,540Interest saved Total interest paid:
= $914,356.80- $706,634.40=$207,722.40Total interest paid:
=$914,356.80- $638,448.30=$275,908.50Total interest paid:
=$914,356.80 - $2,295,540=-$1,381,183.20According to the table above, switching from monthly to weekly repayments will save the couple $1,471.50 over the loan's term. Switching to quarterly repayments will save the couple $5,888.62 over the loan's term. Switching to yearly repayments will save the couple a total of $21,281.61 over the loan's term. Even while there is some money saved, when spread out over 30 years, this sum is insignificant. The couple may still decide to pay monthly to avoid the trouble of having to set up more frequent instalments when the savings aren't significant. The pair could alternatively decide to pay their debts in quarterly instalments to align them with her pay period.
Change 4: Making Lump Sum Payments
The following table compares how much interest can be saved overall when a lump sum payment is made at various points during the loan's tenure.
Table 6: lump sum payments
Original Monthly repayments $15000 Lump sum after 1 year $15000 Lump sum after 10 years $15000 Lump sum after 15 years $15000 Lump sum after 20 years
Info about loan 2.79%pa variable interest rate
Monthly Repayments of $2539.882.79%pa variable interest rate
Monthly Repayments of $2539.882.79%pa variable interest rate
Monthly Repayments of $2539.882.79%pa variable interest rate
Monthly Repayments of $2539.882.79%pa variable interest rate
Monthly Repayments of $2539.88Outstanding loan & Amount after lump sum N = 1 12 = 12I=2.79%PV = $616,000PMT =-2539.88FV = ?P/Y = 12C/Y = 12Fv=-602,536.54+ 15,000 (lump sum)=$587,536.54Outstanding after lump sum
N = 10 12 = 120I=2.79%PV = $616,000PMT =-2539.88 FV = ?P/Y = 12C/Y = 12Fv=-462,887.96+ 15,000=$447,887.96Outstanding after lump sum
N = 15 12 = 180
I=2.79%PV = $616,000PMT =-2539.88 FV = ?P/Y = 12C/Y = 12Fv=-368,764.72+ 15,000=$353,764.72Outstanding after lump sum
N = 20 12 = 240I=2.79%PV = $616,000PMT =-2539.88 FV = ?P/Y = 12C/Y = 12Fv=-260,568.87+ 15,000=$245,568.87Outstanding after lump sum
Time remaining after lump sum N = ?I=2.79%PV =616,000PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=360N = ?I=2.79%PV = 587,536.54PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=332.35332 months N = ?I=2.79%PV = 447,887.96PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=227.20227 monthsN = ?I=2.79%PV = 353,764.72PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=168.50169 monthsN = ?I=2.79%PV = 245,568.87PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=109.64110 monthsTime saved Time taken in original model Amount of time before lump sum Time remaining after lump sum
= 360-12-332
16 months Time taken in original model Amount of time before lump sum Time remaining after lump sum
= 360-120-227
13 months Time taken in original model Amount of time before lump sum Time remaining after lump sum
= 360-180-169
11 months Time taken in original model Amount of time before lump sum Time remaining after lump sum
= 360-240-110
10 months Total repayments Total PMT:
nPMT=3602539.88 Total repayment is
$914,356.80Total PMT:
n=12+332=344Total repayment =
nPMT+lump sum=3442539.88+15000 Total repayment is
$888,718.72 Total PMT:
n=120+227=347
Total repayment =
nPMT+lump sum=3472539.88+15000 Total repayment is
$896,338.36 Total PMT:
n=180+169=349Total repayment =
nPMT+lump sum=3492539.88+15000 Total repayment is
$901,418.12 Total PMT:
n=240+110=350Total repayment =
nPMT+lump sum=3502539.88+15000 Total repayment is
$903,958
Total savings Total interest paid:
= $914,356.80- $888,718.72=$25,638.08Total interest paid:
= $914,356.80- $896,338.36=$18,018.44Total interest paid:
= $914,356.80- $901,418.12=$12,938.68 Total interest paid:
= $914,356.80- $903,958=$10,398.80The accompanying table demonstrates that the greatest interest can be saved by making a lump sum payment earlier in the loan. This makes the most sense because lowering the balance of the loan leaves less principal for the interest to be based on. Also, to be more accurate, it depends on when the couple receives this amount of money because it is unlikely that they will be able to pay $15,000 after one year, but if they have some money saved up or inherit it, they might be able to pay the lump sum after 15 years. And by doing this, the pair will save $12,938.68 in interest over the course of the loan.
Change 5: Using an Offset Account
The original model and three additional models are compared in the table below. In each of these three models, $100,000 will be put in an offset account to prevent the debt from varying until it is paid off.
Table 7: Using an offset account
Original (No Offset) $100,000 in an Offset Account after 5 years $100,000 in an Offset Account after 10 years $100,000 in an Offset Account after 15 years
Loan information 2.79%pa variable interest rate
Monthly Repayments of $2539.882.79%pa variable interest rate
Monthly Repayments of $2539.882.79%pa variable interest rate
Monthly Repayments of $2539.882.79%pa variable interest rate
Monthly Repayments of $2539.88Amount due before the offset account N = 5 12 = 60I=2.79%PV = $616,000PMT =-2539.88FV = ?P/Y = 12C/Y = 12Fv=-544,768.95Amount owed:
$544,768.95N = 10 12 = 120I=2.79%PV = $616,000PMT =-2539.88FV = ?P/Y = 12C/Y = 12Fv=-462,887.96Amount owed:
$462,887.96N = 15 12 = 180I=2.79%PV = $616,000PMT =-2539.88FV = ?P/Y = 12C/Y = 12Fv=-368,764.72Amount owed:
$368,764.72Time to pay off the loan N = ?I=2.79%PV =616,000PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=360N = ?I=2.79%PV =544,768.95-100,000 = 444,768.95PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=225.12n 225
Total = 225 + 60= 285 months N = ?I=2.79%PV =462,887.96-100,000 = 362,887.96PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=173.86n 174Total = 174 + 120= 294 months N = ?I=2.79%PV =368,764.72-100,000 = 268,764.72PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=121.60n 122
Total = 122 + 180= 302 months
Time saved N= 360 285= 85 months 7 years and 1 monthN= 360 294= 66 months 5 years and 6 monthsN= 360 302= 58 months 4 years and 10 monthsTotal repayments Total PMT:
nPMT=3602539.88 Total repayment is
$914,356.80Total PMT:
nPMT+100,000=2852539.88+100,000 Total repayment is
$823,865.80Total PMT:
nPMT+100,000=2942539.88+100,000 Total repayment is
$846,724.72Total PMT:
nPMT+100,000=3022539.88+100,000 Total repayment is
$867,043.76Interest saved Total Interest saved:914,356.80- 823,865.80=$90,491 Total Interest saved:914,356.80- 846,724.72=$67,632.08Total Interest saved:914,356.80- 867,043.76=$47,313.04According to the above table, the couple will save $90,491 if they have the $100,000 in an offset account after five years. When a $100,000 offset is applied to the loan over 10 years, the interest that is saved drops to $67,632.08 after 5 years and 6 months. Finally, the time and money saved are reduced to $47,313.04 and 4 years, 10 months in the offset account that is established 15 years into the loan. Taking everything into account, she will have more time and money the sooner the couple is able to open the offset account. Even after taking everything into account, the couple will likely save a significant amount of money over the course of the loan if they have about $100,000 in the offset account (from any point of the loan).
Change 6: Using combinations
When $100,000 is in an offset account with various payment frequency, the interest on the loan will be compared in the table below. The payments won't be recalculated even if the payment frequencies will change; instead, the monthly payments will be split correctly to fit the new payment frequencies. In order to demonstrate how these two tactics may be utilised successfully in collaboration with one another to reduce interest throughout the course of the loan, a mix of the two strategies has been presented.
Table 8: $100,000 in an offset account and increasing the repayment frequency
$100,000 in offset and monthly repayments $100,000 in offset and fortnightly repayments $100,000 in offset and weekly repayments
Loan information 2.79% p.a.
Monthly repayments of $2539.88 2.79% p.a.
fortnightly repayments of $5,888.62 2.79% p.a.
weekly repayments of $1,471.50
Duration of loan N = ?I=2.79%PV =616,000-100,000PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=275.29275 monthsN = ?I=2.79%PV =616,000-100,000PMT =-1269.94FV = 0P/Y = 26C/Y = 12n=533.89533.89 fortnightsN = ?I=2.79%PV =616,000-100,000PMT =-634.97FV = 0P/Y = 52C/Y = 12n=1067.391067.39 weeksTotal repayments Total PMT:
nPMT+offset amount=2752539.88+100,000 Total repayment is
$798,467Total PMT:
nPMT+offset amount=5341269.94+100,000 Total repayment is
$778,147.96Total PMT:
nPMT+offset amount=1067634.97+100,000 Total repayment is
$777,512.99Interest saved Total interest saved:
914,356.80- 798,467=$115,889.80 Total interest saved:
914,356.80- 778,147.96 = $136,208.84 Total interest saved:
914,356.80- 777,512.99= -$136,843.81By switching from monthly to fortnightly frequency payments, the table above shows a savings of $136,208.84. The couple will gain from saving more than $100,000. The couple continues to make the same monthly payments in addition to this. With weekly payments rising further, the couple is saving money totalling to $136,843.81, making this the most sensible course of action. The pair should adhere to making quarterly payments to be in sync with their cycle in order to prevent this, as well as saving money during the loan's term. The couples pay periods will also change be changed (p/y), to fortnightly and weekly, but the bank will continue to charge interest at a monthly rate (c/y = 12).
Financial Hardship Model:
After paying minimum monthly repayments for 15 years, Calvin was in an injury cause by a plane crashing into a building. Therefore, he must be on medical leave for 2 years and is also unavailable to work his regular hours. For just this year, the couple chooses to pay a quarter of their monthly repayments for the 2 years. After the year has passed, the couple will be returning to pay the regular full repayments. The following table below will show this as well as the interest that the couple has gathered in payments.
Table 9: financial hardship table
Original Model Financial hardship charges
Loan information 2.79% p.a.
Monthly repayments 2.79% p.a.
Monthly repayments
Monthly repayments N = 3012 = 360I=2.79%PV = $616,000PMT =?FV = 0P/Y = 12C/Y = 12PMT = -2539.88For the first 15 years:
= $2539.88
For the 1 year of hardship:
=$634.97
For the remainder of the loan
=$2539.88
Outstanding balance after financial hardship Remainder of the first 15 years of the loan:
N = 15 12 = 180I=2.79%PV = $616,000PMT =-2539.88 FV = ?P/Y = 12C/Y = 12Fv=-368,764.72=$368,764.72Remainder after 2 years of financial hardship:
N = 2 12 = 24I=2.79%PV = 368,764.72PMT =-634.97 FV = ?P/Y = 12C/Y = 12Fv=-374,247.69=$374,247.69Duration of the loan N = ?I=2.79%PV =616,000PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=360Remainder after 2 years of financial hardship:
N = ?I=2.79%PV =374,247.69PMT =-2539.88FV = 0P/Y = 12C/Y = 12n=180.61181Total months = 180 + 12 + 181
Total months = 373
Total repayments Total PMT:
nPMT=3602539.88 Total repayment is
$914,356.80Total PMT:
nPMT=1802539.88+12634.97+(1812539.88) Total repayment is
$924,516.32Interest added 914,356.80- 924,516.32= Added 10,159.52
From the table above, having to pay quarter payments for 2 years, add 13 months t the loan term and will also cost the couple an additional $10,159.52 in interest. This table has been included to show the nature of compound interest and represent how the financial situation can lead to large changes in the amount of interest paid throughout the term of loan.
Assumptions:
Throughout this enquiry, a few assumptions have been made. One of these presumptions is that the bank will permit the couple to shorten the loan's duration. Unknown to the couple, some institutions will reject their request to do so. The assumption that the house would remain intact and that the couple won't run into any further financial difficulties is another one that is made throughout the study.
This research also makes the assumption that the interest rate won't vary over the course of the loan. Depending on a variety of variables, such as inflation and the effectiveness of the home marketing. Since the interest rate wouldn't change, this assumption would not be as reasonable.
The couple's willingness to contribute a significant portion of her savings towards a 20% deposit is the investigation's final supposition. The loan amount would have been higher if the couple had chosen to put down a 10% deposit. Additionally, because interest is computed based on principal, the minimum monthly payments would likewise increase as the total interest paid over the life of the loan increased.
Limitation:
There may have been better solutions for this examination with better and more realistic amounts of savings because not all strategies were taken into consideration in this study, which is one of its limitations. But there has been extensive research on the best and most workable solutions to reduce the constraint.
Because not all banks were taken into account for this assignment, there may have been better banks that could have been the couple with a lower comparison rate, as well as having a better-established charge and ongoing fee.
The fact that we don't know the couple's credit history is a limitation in this research because we can't determine whether each of the banks would accept their offer or even if their favoured bank would accept it.
Conclusion:
In this enquiry, it is discovered that employing all available techniques yields excellent loan results. However, the change 2 strategy, where we altered the frequency of payments, is the one that stands out the most and yields the best ideal solution. The pair was able to save the most money out of all the tactics they employed in the table, saving a total of $275,908.50.