Question

emily, bev, and doug had originally thought that the computer equipment upgrade that abc decided to undertake could be paid for with cash in the bank. as at june 25, 2024, the balance of the 5% mortgage payable after making the payment on that day was $51,096. monthly principal and interest instalment payments are $714, paid on the 25th of each month. the mortgage is up for renewal on november 25, 2024. because interest rates have fallen since the original mortgage was signed, it can be renewed at an interest rate of 4%. in addition, emily has decided to reduce the mortgage term to five years, instead of the seven years remaining. the abc upgraded its server and other computing equipment. unfortunately, there was not enough cash to pay for the equipment. abc arranged for a $45,000 operating line of credit with its bank, using $23,000 of this line to finance this upgrade. emily would like to pay off the operating line of credit by transferring the $23,000 owed on the line to the mortgage payable balance outstanding instead of trying to pay the balance owed on the line of credit from cash generated from operations. the bank has agreed to accommodate both of these requests and has advised that the monthly instalment payments will be $1,318 for the combined amounts and revised term, with payments starting on december 25, 2024.

Answer 1

This financial scenario involves consolidating a line of credit with a mortgage and renegotiating payment terms to manage the additional debt. It underscores the impact of interest rates and loan terms on the total amount paid over time. Examples provided illustrate how slight changes in loan payments can lead to significant savings.

Step-by-step explanation:

The scenario described involves several financial concepts such as mortgages, loan repayments, and financing upgrades through operating lines of credit. Emily, Bev, and Doug from ABC company initially believed they could pay for a computer equipment upgrade with the available cash. However, they had to utilize a $45,000 operating line of credit, borrowing $23,000 for the upgrade.

They plan to add this debt to their existing mortgage, which is due for renewal at a lower interest rate and a shorter term. ABC's bank agreed to consolidate the debts and established new monthly instalment payments of $1,318 starting from December 25, 2024. This reflects a common financial situation where a planned expense exceeds available funds, leading to a re-negotiation of loan terms to accommodate the new debt.

As the scenario emphasizes the significance of interest rates and terms on the total amount paid for a loan, it is crucial to understand that even slight adjustments can lead to substantial differences over time. For instance, under certain conditions, the difference between paying a loan over 30 years versus paying it off in 24.5 years can save over $73,000.

This concept is further illustrated by examples such as taking out a house loan with annual payments of $12,000 at an interest rate of 4.2%, and how an adjustable-rate mortgage can impact monthly payments depending on interest rate fluctuations.