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b)Assume that the family opts for a fully amortizing adjustable rate mortgage (ARM) for 30...

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Finance

b)Assume that the family opts for a fully amortizing adjustable rate mortgage (ARM) for 30 years with a teaser rate of 1.5% for the first two years. The family buys a house for 200,000 by making a deposit of 20,000 and taking on a mortgage loan of 180,000. It is expected that the standard variable rate that will apply for this mortgage loan in two years is 3.5%. Determine the monthly repayments for the third year. (25 marks)

c)The family learns about the existing Help to Buy: Equity Loan programme and considers using the scheme to take an equity loan of 40,000, make a deposit of 20,000 and borrow the remaining 140,000 using the ARM described in part b). The family plans to refinance the mortgage loan once the 2-year ARM teaser rate period ends and to repay the equity loan. The home value appreciation for the next two years is expected to be 2% per annum. Outline the main provision of the Help to Buy: Equity Loan programme, in particular the eligibility and repayment rules. Explain the pros and cons for the family of using this scheme. Based in the current example, discuss whether the family should use the equity loan scheme or use the ARM alternative described in part b). (30 marks)

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