Topic 20

Question 1

With a 25-year repayment mortgage, assuming that payments are made on time, which of the following statements regarding the monthly payments is true?

a. More capital will be repaid each month if interest rates rise.

b. Payments in the early years consist of more capital than interest.

c. Payments in the final years consist of more capital than interest.

d. Payments throughout the term are evenly balanced between capital and interest.

Answer 1

c. Payments in the final years consist of more capital than interest.

Question 2

John has just taken out a 20-year repayment mortgage for £75,000 on an annual rest basis.

If the interest rate were to remain constant at 6% for the first 12 months and the total monthly repayments to the lender are calculated at the rate of £7.30 per £1,000 borrowed, how much capital will he repay in the first year?

a. £1,090.

b. £1,640.

c. £1,900.

d. £2,070.

Answer 2

d. £2,070.

Annual rest means the interest is calculated at the beginning of every year. This type of “rest” results in the most interest being paid.

(7.30 x 75) x 12 = 6570
(75000/100) x 6 = 4500
6570 - 4500 = 2070