Posted: January 18th, 2017

# If the bank lends Alice at an interest rate of 6 percent per annum principle and interest, how long will Alice pay off the loan for the house?

. Question 1 Alice just finished Deakin University and is now working for the ANZ bank as a financial analyst. Her salary is 75,000 per annum but will increase at the rate of 5% per year for the next 5 years. After 5 years, Alice can apply for a promotion to the next level where her salary would be 120,000 per year and increase at the rate of 5% per year for the next 6 years. After these 6 years, Alice is not sure whether she will be promoted again so she assumes that her salary will stay at this level for the next 20 years when she thinks about retirement. Alice wants to buy a 2 bed room house and plans to save for a deposit for the next 5 years. Currently, the cost of the 2 bed room house in an area that Alice likes is \$640,000. Based on recent market performance in the area, the price of a 2 bed room house will increase at the rate of 7% per annum. a. Alice plans to use 50 percent of her after tax salary as savings for the deposit of the house. How much deposit would Alice is able to save after 5 years and how much does she have to borrow? Since interest rate is so low, if Alice leaves the money in the bank, she can only earn an interest of 2% per annum. b. If the bank lends Alice at an interest rate of 6 percent per annum principle and interest, how long will Alice pay off the loan for the house? The bank requires Alice to make monthly repayment to the loan. However, she can choose to make the payment fortnightly if she wishes to. Alice continues to contribute 50 percent of her after tax salaries towards the loan. c. Instead of putting her savings in a bank account, Alice can invest in an annuity stream which earns a rate of return of 10 percent per annum. This type of investment requires Alice to invest into an investment fund for 5 years where each year she has to put in \$15,000. Recall that Alice plans save 50 percent of her after tax salary for the deposit, since she can only put \$15,000 in the investment fund each year, the remaining money will be put into a bank account which earns 2% per annum. If Alice takes the investment option, how much will she able to accumulate after 5 years, how much will she have to borrow and how long before she can pay off the house?

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