The purpose of this Folio is to purchase a house under a million dollars and work out how much interest can be saved on the home loan. A house in Ad

Introduction:

The purpose of this Folio is to purchase a house under a million dollars and work out how much interest can be saved on the home loan. A house in Adelaide will be chosen, which is shown below, and a loan will be taken out on it after the deposit of 20% paid on it. Two banks will be compared using the comparison rates method and whichever bank offers the better comparison rate, will be the bank used in the investigation part. There will be an exploration of different techniques used to find savings on the home loan interest; these techniques include making larger payments per period, making more frequent payments, reducing the term of the loan, refinancing the loan, making lump sum payments or using an offset account. At the end of the different investigations of the interest saving methods, the superior option will be picked and analysed why.

(MAKE AN EXAMPLE BASED ON THIS INFORMATION)

House choice: EXAMPLE

11/47 Wickham Road, Happy Valley, SA 5159

Property price = $ 695,000 EXAMPLE

Loan type and amount:

Deposit = 20%

20%100=0.20.2$695,000=$139,000A deposit of $139,000 will need to be made before a home loan can be taken out, this means that the home loan will be valued at $556,000 ($695,000-$139,000=$556,000). The repayment time is 25 years and both banks compound monthly.

NABs fixed rate home loan = 6.84% p.a. interest rate & 7.01% p.a. comparison rate + monthly $8 service fee

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Commonwealths fixed home loan = 6.69% p.a. interest rate & 7.82% p.a. comparison rate + $395 annal wealth package fee.

Comparison rates:

NABs home loan comparison / 6.84% p.a. compounded monthly with a monthly $8 service fee.

N=12 compounding periods 25 years=300 I%=6.84 PV=$556,000 PMT= ? FV=0 P/Y=12 C/Y=12PMT-$3,873.13+$8 fee

NABs home loan repayment per month equals to about $3,881.13

N=12 compounding periods 25 years=300 I%= ? PV=$556,000 PMT=-$3,881.13 FV=0 P/Y=12 C/Y=12I%6.86% comparison rate

Commonwealths home loan comparison / 6.69% p.a. compounded monthly with an annual $395 wealth package fee.

$556,000+$39525 years=$565,875N=12 compounding periods 25 years=300 I%=6.69 PV=$565,875 PMT= ? FV=0 P/Y=12 C/Y=12PMT-$3,888.28

Commonwealths home loan repayment per month equals to about $3,888.28

N=12 compounding periods 25 years=300 I%= ? PV=$556,000 PMT=-$3,888.28 FV=0 P/Y=12 C/Y=12I%6.88% comparison rate

Therefore NAB is the better bank to use than Commonwealth since NABs comparison rate is 0.2% less than Commonwealths.

Calculating the minimum monthly repayment and the interest charged at chosen bank, NAB:

NABs home loan minimum monthly repayment:

N=12 compounding periods 25 years=300 I%=6.84 PV=$556,000 PMT= ? FV=0 P/Y=12 C/Y=12PMT-$3,873.13

NABs home loan minimum monthly repayment equals to about $3,873.13

NABs home loan interest charged:

$3,873.13300=$1,161,939 total repayment amount

$1,161,939-$556,000=$605,939 interest charged

NABs home loan charged $605,939 interest over 25 years.

So, over the 25 years, $605,939 in interest will be paid back. The goal now is to minimise the interest using various strategies so the loan is paid back quicker and cheaper. THIS ONE IS AN EXAMPLE

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US THIS HOUSE AND THE INTEREST BELOW

15 Hawkins Avenue Hillcrest, SA 5086

Property Price: $732,000

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The deposit is 20% which is 0.2

20%100=0.2 0.2$732,000=$146,400I have to deposit $146,400 thus, I have to take out a loan of $585,600 ($732,000-$146,400)

Repayment time is 25 years while both banks will compound monthly.

Commonwealth:

Fixed home loan + $395 annual wealth package fee.

NAB:Fixed home loan + $8 monthly service fee.

239151208807500

Comparison rates

Commonwealth-

Principal + initial frees = $585,600 + ($39525years)

= $595,475

N= 2512= 300 I%=6.69 PV=$595,475 FV=0 P/Y=12 C/Y=12 PMT= -4091.672243

The monthly repayment required to repay $595,475 is $4091.68.

N= 300 PV=$585,600 PMT=-4091.62 FV=0 P/Y=12 C/Y=12 I%= 6.873256919

By using this repayment, can find the comparison interest rate for repaying the original loan of $585,600.

The comparison rate 6.87% p.a.

NAB-

There are no initial fees to add to the principal

N= 2512= 300 I%= 6.84% PV=$585,600 FV=0 P/Y=12 C/Y=12

PMT= -4079.320322

The monthly repayment required to repay $585,600 is $4079.33.

We add the service fee to the monthly repayment, so the monthly repayment is $4079.32 + $8 = $4087.33

N= 2512= 300 PV=$585,600 PMT=$4087.32 FV=0 P/Y=12 C/Y=12 I%= 6.86154379

Using this repayment can find the comparison interest rate for repaying the original loan of $585,600.

The comparison interest rate 6.86% p.a.

Since NAB's comparative rate is 0.1% lower than theCommonwealth's, NAB is therefore preferable to use.

PMT

Calculating the interest charged at the selected bank and the minimum monthly repayment: NAB

NABs home loan minimum monthly repayment:

N= 25 year12 compounding period = 300 I%= 6.84% PV=$585,600 FV=0 P/Y=12 C/Y=12

PMT= -4079.320322

NABs home loan minimum monthly repayment equals about $4,079.32

NABs home loan interest charged:

$4,079.32300=$1,223,796 total repayment amount

$1,223,796-$585,600=$638,196 interest charged

NABs home loan charged $638,196 interest over 25 years.

Thus, $638,198 in interest will be reimbursed over the course of 25 years. The current goal is to use a variety of strategies to minimiseinterest so that the loan may be repaid quicker and more affordable.

WRONG NUMBERS PMT WRONG/IGNORE

EXAMPLE

Strategy exploration 1 (Making larger repayments per period): USE THIS EXAMPLE TO EXPLAIN

To lower the $608,339 interest, instead of paying $3,881.13 every month, the PMT amount will be made bigger into $3,950 per month and then into $4,050 per month. This was possible to do because $3,881.13 is only the minimum monthly repayment, this means that the lowest I can pay per month is $3,881.13 to pay to loan off in 25 years, it also means that I can raise the PMT to a reasonable value and pay the loan back quicker. (WE ARE MAKING STRATEGIES TO LOWER THE INTEREST LIKE IN THIS EXAMPLE BUT USING THIS INTEREST $638,196)

(MAKE 2 EXPLORATIONS FOR EACH STRATEGIES)

(PMT = $3,950 per month) exploration:

N=? I%=6.84 PV=$556,000 PMT=$3,950 FV=0 P/Y=12 C/Y=12N285.2 months or 23 years and 10 months

Month to year conversion

28612=23.83 23.83-23=0.83 0.8312=10 23 years and 10 months

2- (PMT = $4,050 per month) exploration:

N=? I%=6.84 PV=$556,000 PMT=$4,000 FV=0 P/Y=12 C/Y=12N268.4 months or 22 years and 5 months

Month to year conversion

26912=22.41666667 22.41666667-22=0.4166666667 0.416666666712=5 22 years and 5 months

Analysis of strategy 1: (ANALYSIS THE STRATEGYS)

The first exploration gave us a time of 23 years and 10 months, which is 1 year and 2 months less. The savings from the first exploration are:

$3,881.13286=$1,110,003.18 total repayment amount

$1,110,003.18-$556,000=$554,003.18 interest charged

$608,339-$554,003.18=$54,335.82 interest saved

The second exploration gave us a time of 22 years and 5 months, which is 2 year and 7 months less. The savings from the second exploration are:

$3,881.13269=$1,044,023.97 total repayment amount

$1,044,023.97-$556,000=$488,023.97 interest charged

$608,339-$488,023.97=$120,315.03 interest saved

Discussion of strategy 1: (MAKE A DISCUSSION OF THE STRATEGIES)

A saving of $120,315.03 has been achieved all because of the PMT had gone up to $4,050; but this is if $4,050 is paid every month, given the possible limitations of life, the PMT amount could change or $4,050 per month is not an affordable amount for the home buyer to pay. In general, increasing the monthly payments is a good way to save on interest but only if one can afford to.

(FROM THIS EXAMPLE MAKE DIFFERENT STRATEGIES TO LOWER THE INTEREST OF $638,196)

Strategy exploration 2 (Making more frequent repayments):

Strategy exploration 3 (Reducing the term of the loan):

Strategy exploration 4 (Changing interest rates):

Strategy exploration 5 (Making lump-sum payment):

Strategy exploration 6 (using offset account):