Question

You secured bank financing to purchase a $560,000 house using a 80% Loan to Value (LTV) ratio constant payment mortgage loan maturing in 35 years. The loan is fully amortising with a nominal annual interest rate of 3.58% and monthly payments. For repaying your loan early, at the end of year 4, the lender charged a break fee of 2.2%. Calculate the effective borrowing cost of this loan over the 4-year term. Enter your answer without the percentage [%] sign rounded to 4 decimal places (e.g. 10.3456).

Answer 1

The effective borrowing cost of a loan secured to purchase a $560,000 house with an 80% Loan to Value (LTV) ratio and a 3.58% interest rate, maturing in 35 years, can be calculated by considering the principal amount, interest rate, and any break fees.

To calculate the effective borrowing cost of the loan over the 4-year term, we need to consider the principal amount, the interest rate, and any break fees.

Here are the steps to calculate the effective borrowing cost:

1. Determine the total amount borrowed, which is 80% of the house value: $560,000 * 0.8 = $448,000.
2. Calculate the interest paid over the 4-year term: $448,000 * 0.0358 * 4 = $64,256.
3. Calculate the break fee: $448,000 * 0.022 = $9,856.
4. Add the interest paid and the break fee: $64,256 + $9,856 = $74,112.
5. Calculate the effective borrowing cost: $74,112 / $448,000 = 0.1654.

The effective borrowing cost of this loan over the 4-year term is 0.1654 or 16.54%.