Calculation of Effective Interest Rate for Loan Repayment

Question

You and your partner want to buy a house

City Bank will give you a $200,000 loan for 20 years. They will charge you 5% concessional interest for the first year, after which the loan reverts to their normal variable rate, which is currently 8.75%. They will also charge you a $600 application fee, plus when you make your loan enquiry you can have as much coffee as you can drink.

The Republic Bank will also give you a $200,000 loan for 20 years, but their concessional interest rate for the first year is 6.75%, after which the loan reverts to their normal variable rate, which is also 8.75%. However, there is no fee and no coffee.

Both banks compound interest daily and you will make your loan payments fortnightly. Assume there are 26 fortnights per year (520 over 20 years), and banks use a 365-day year to calculate the interest charge.

a. What would your fortnightly loan payment be for each bank?

b. Assuming you can drink $5 worth of coffee, which bank offers the best deal

Summary

The question belongs to Finance and it discusses about effective interest concepts and

Total Word Count 178