Planit:UK Endowment Loan Case Study

From Planipedia

This case study is specific to financial planning in the United Kingdom, so has fixed values rather than indices by country. For a similar case study applicable to other countries, please see Planit:Loan Calculator Case Study.

Endowment Mortgage Example One:

Stewart and Linda took out a £220,000 endowment-type mortgage loan twelve years ago with an interest rate of 7.5% compounded annually. They have been putting an extra £300 on to their monthly payments to try and re-pay the principal, and have made a £10,000 lump sum payment five years ago. They plan to make another £10,000 payment in about three years.

Solution Using Loan Calculator:

Access the Loan Calculator from the Home page, and enter the data as follows:

1. . Enter the £220,000 in the Amount borrowed field.

1. . Enter the Loan Date as 12 years ago today.
2. . Leave the Renewal Date as the default for now, since we are first calculating for the interest only payments.
3. . Enter an Interest Rate of 7.5%.
4. . Click the drop down menu under the Compounding field and choose Annual.
5. . Also leave the Amortization at the default for now.
6. . Click the drop down menu under Payment Type and choose the Interest Only option.
7. . If necessary change the Frequency of Payments to the Monthly option.
8. . Click on the Calculate button next to Payment.

The result should be £1,329.88.

1. . Now we must add the payments they make towards the principal. Change the Payment to £1,629.88 to show the extra payment of £300 each month
2. . Set the Number of Irregular Payments to two (2): one for the payment they have already made and the second for the planned future payment.
3. . Click Set
4. . Set the first Date field to five years ago today, with the Amount as £10,000
5. . For the second irregular payment, set the Date to three years from today, for the Amount of £10,000.
6. . Click Calculate beside the Amortization

The answer should be roughly 21 years.

1. . Click on the Schedule button at the bottom of the screen to view the payment schedule.
2. . Identify the Balance that remains at today’s date.

The balance of the mortgage should be £137,068.62

Go to the exercise to test your knowledge on endowment type loans.