• When ever you take a loan out – the goal is to
pay off your debt.
• In the first part of a loan, the majority of your
repayments are interest.
• The way to reduce debt quickly is:
• To try to make more payments
• Increase the size of your payments
• Pay lump sum deposits
FORTNIGHTLY PAYMENTS Example
• You buy a house for $280,000 and the rate is
5.5% p.a. compounding monthly for 30 years.
• What are the size of your monthly
repayments.
• Change these to fortnightly payments and
calculate how long it will take to pay off the
loan and show how much you save.
• Enter the data into the calculator (use the
compound interest window):
N=
30 x 12
I% =
5.5
PV =
280000
Pmt = ?
FV =
0
P/Y = 12
C/Y = 12
PMT : $1589.81
• Now you need to divide the payment by 2 and
change P/Y to 26 – but leave C/Y at 12.
N=
?
I% =
5.5
N = 646 fortnights
PV = 280000
Pmt = -794.91
FV =
24.85 years
0
P/Y = 26
C/Y = 12
This is your original monthly
payments
You save 5.15 years – so 5.15 x 12 x 1589.81= $98,250.26
Assumptions
•
•
•
•
•
Rates stay the same
Inflation is steady
Bank fees and charges – may increase pmt’s
Tax
Dual incomes – so you can pay this amount.
Making Larger Repayments
This type of question has multiple parts – so you need to work through slowly.
On the next slides you will see the calculator screens needed to get to the
answer – then also the solution in the book.
First you need to calculate PMT
Need to calculate how much interest over the whole loan – use AMT
Now you have to add $100 to the payment and recalculate N.
Notice that we have taken 100 from the original pmt – this is
because it is a negative number and we have to make it larger – so
we take the 100 off. So it will become -1479.78
We now have to
calculate N again
So you press F1
This means that it will take 244.7 months to pay off the loan with the new
repayment. You need to round this up to the next whole number – so therefore it
means that it will take 245 months to pay off the loan.
You now need to calculate how
much interest you would pay over
this time – so once again you need
to use the AMT function of the
calculator.
You will have to alter N to ensure
that this works.
You then enter PM1 and PM2 with PM2
being equal to the “new” N
Now you find the total interest
paid.
Finally calculate savings in interest:
238936.32 – 187172.57 = $51763.75
• If you can pay a lump sum off your loan at
anytime – then you can save money and time
on your loan.
• Consider the following scenario :
– You buy a house for $300,000 and the rate is 5.5%
p.a. compounding monthly for 30 years.
• After 5 years you pay a lump sum of $10,000 –
how much does this save you?
1. Enter the data into the calculator (use the
compound interest window):
N=
30 x 12
I% =
5.5
PV =
300000
Pmt = ?
FV =
0
P/Y = 12
C/Y = 12
PMT : $1703.37
2. Calculate Outstanding Debt
• Now we need to calculate the outstanding debt at the 5 years
mark – that is how much we need to pay off.
• So using the previous question – how much is owed on the loan
at the 5 year mark – PM2 = 5x12
PM1 = 1
PM2 = 5x12
N=
360
I% =
5.5
PV =
300000
Then on the bottom menu bar there is BAL (F1)
This stands for the balance owing up to this point.
Hit that button and it will calculate how much you
owe on the loan.
Pmt = -1703.37
FV =
0
P/Y =
12
C/Y =
12
$277381.81
3. Now take the lump sum from this and then
calculate how long it will take to pay the loan
off.
N=
?
I% =
5.5
N : 277.95 months
PV = 277381.81- 10000
Pmt = -1703.37
FV =
N : 23 years (approx)
0
P/Y = 12
C/Y = 12
Save approx 2 years – 2 x 12 x 1703.37 = $40880.88