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A young family considers buying a property for an asking price of $210,000. The going...

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Finance

A young family considers buying a property for an asking price of $210,000. The going rent for comparable properties in the same neighbourhood is currently $500 per month. The ownership option involves a deposit of 20% of property value. The remaining balance will be financed with an interest-only mortgage loan (with monthly repayments) with an interest rate of 2% for 10 years. The cost of homeownership also includes annual maintenance ($500 p.a.) and insurance ($140 p.a.).

  1. Determine the monthly mortgage repayments of the family. The family believes that rents for this property type will remain unchanged in the next ten years. Calculate the net cash flows of the homeownership option for years 1 through 9. (25marks)

  2. For the next ten years, the house price appreciation is expected to be 2% per annum. Assume that the family requires an annual return of 7% on its investment. Analyse whether it would be preferable for the family to buy the property, use it as a main residence, and resell it after ten years (rather than renting a similar property). For your calculations assume that the real estate agents commission is 4% of the transaction (resale) price in this local residential market.(30 marks)

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