Planit:UK Endowment Loan Exercise Answer Key

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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 Exercise.


Question One:

Shawn and Nancy have bought a house together and want to pay off their £250,000 interest-only mortgage as quickly as possible. They are currently making monthly payments of £1,216.89. The mortgage is compounded annually, at an existing interest rate of 6%. How will each of the following payment adjustments affect the difference for the overall amortization period?

Increasing payments by 3% annually ________years

Paying an anniversary lump sum of £1000 ________years

Making two lump sum payments of £10,000 one after the first 3 years, and one after 6 years ________years

Answer:

  1. Select Loan Calculator from the Calculators drop down menu on the home page.
  2. Enter the £250,000 amount in the Amount borrowed field.
  3. Enter the Loan Date as today’s date.
  4. Leave the Renewal Date at the default since we do not know when the loan needs to be renewed.
  5. Enter an Interest Rate of 6%.
  6. Click the drop down menu under the Compounding field and choose Annual.
  7. Set the Amortization to years using the radio buttons to the right.
  8. Click the drop down menu under Payment Type and choose the Interest Only option.
  9. If necessary change the Frequency of Payments to the Monthly option.
  10. Enter £1216.89 next to Payment.
  11. Enter 3% in the Increase/Year field measuring percentages and not dollar amounts.
  12. Click Calculate beside the Amortization Period.

The result should be 24.083 years.

  1. Set the Increase/Year field back to 0%
  2. Enter £1000 in the Anniversary Lump field.
  3. Click Calculate beside the Amortization Period.

The result should be 47.583 years.

  1. Set the Anniversary Lump field back to £0
  2. Enter 2 in the Number of Irregular Payments field.
  3. Click Set
  4. Enter the Amount value as £10,000 for both payments. Change the first Date to 3 years from today, and the second Date to six years from today.
  5. Click Calculate beside the Amortization Period.

The result should be 47.833 years.

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