Home Loans With Different Rests: Computing Their Effective Rates

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Home Loans With Different Rests: Computing Their Effective Rates

  1. 1. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Home Loans With Different Rests: Computing Their Effective Rates
  2. 2. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance • Nominal interest rate does not reflect the true cost of borrowing. Financial institutions use different reference rates to calculate the cost of borrowing to customers. • In Singapore, banks can use the effective interest rate or the nominal rate. For licensed moneylenders they are mandated by law to show the effective interest rate. So But
  3. 3. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Elsewhere in the world, banks may use the nominal rate per annum (p.a.). For example, in Canada, Hong Kong, UK and US it is known as the Annual Percentage Rate (APR). In Australia, borrowing costs are reflected to borrowers in the Comparison Rate which takes into account the "hidden" costs like the upfront fees and charges on top of the interest rate and frequency of repayments.
  4. 4. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Back to Singapore, it is not legislated that banks use the effective rate on their loans. However, we are going to calculate the effective rate for mortgages on different rests, but with monthly installments.
  5. 5. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Equivalent Nominal Rate (ENR) To make a comparison among housing loans with different rests, with the same number of installment periods We first have to find the Equivalent Nominal Rate (ENR) per annum.
  6. 6. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Firstly, what is the present value factor (PVF) of an annuity? In mathematical notation it is defined as PresentValueFactor(PVF)=(1− (1+ rn (m) m ) − my )÷ rn (m) m rn (m) :nominal rateorthe ENR m:number of compounding per year y:numberof years
  7. 7. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Furthermore, we have PVF= principal instalment
  8. 8. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Finding ENR using Excel Excel Function – RATE RATE will return , ENR is then m*RATE RATE (NPer, PMT, PV, FV, Type, Guess): The nominal interest rate per period for an annuity rn (m) m
  9. 9. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Finding ENR using Excel. NPer (Required): Total number of compounding periods or payment periods PMT: (Required): Total payment (principle and interest) payable for that compounding period PV: (Required): Present value of the loan FV: Loan amount outstanding after all payments have been made. If this variable is omitted, Excel will assume the default value of 0. Type: The timing of the payment. It can be either 0 or 1. If this variable is omitted, Excel will assume the default value of 0.
  10. 10. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Finding ENR using Excel ExplanationValue Payments are due at the end of the period. (default)0 Payments are due at the beginning of the period.1 Guess: Your guess of what RATE is. If omitted, it is assumed to be 10%.
  11. 11. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Using RATE RATE is independent of the loan amount and installment in each period. Meaning, RATE will be the same for loans with the same number of payment periods and nominal interest rate per annum.
  12. 12. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Using RATE Loan A Loan Quantum = S$1 million Loan Tenure = 20 years Interest Rate = 10% p.a. Annual Rest with Monthly Repayments Number of Payment Periods = 12 * 20 = 240 Monthly Installment for the First Year = $ 9,788.30
  13. 13. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Using RATE Loan B Loan Quantum = S$5 million Loan Tenure = 20 years Interest Rate = 10% p.a. Annual Rest with Monthly Repayments Number of Payment Periods = 12 * 20 = 240 Monthly Installment for the First Year = $ 48,941.51
  14. 14. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Using RATE Enter the syntax as shown in Table 1: Table 1 For both loans, the RATE will return 0.83%. The ENR per annum is then 12*0.83% = 10.21%. =RATE (240, 9788.3, -1000000)Loan A =RATE (240, 48941.51, -5000000)Loan B
  15. 15. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance How To Compute The ENR For Loans With Different Rests, But All With Monthly Repayments. ENR for XX-rest Loans with Monthly Installment We will rely on the loan with the next parameters Loan Quantum = S$1 million Loan Tenure = 20 years Interest Rate = 10% p.a.
  16. 16. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Table 2: Monthly Installment for the First Year The monthly payment amount for the three rests Monthly Payment ($) 9,506.0Daily Rest 9,650.2Monthly Rest 9,788.3Annual Rest
  17. 17. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Enter the below syntax to find the ENR, Table 3 Syntax =12* RATE (240, 9506.0, - 1000000) Daily Rest =12* RATE (240, 9650.2, - 1000000) Monthly Rest =12* RATE (240, 9788.3, - 1000000) Annual Rest
  18. 18. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance And Excel will yield the following ENR based on monthly rest. We just obtained the nominal rate based on monthly rest for the daily-, monthly- and annual-reducing loans. We need to convert the interest to a common basis in order to carry out fair comparison.
  19. 19. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Table 4 ENR (%) 9.78Daily Rest 10.00Monthly Rest 10.21Annual Rest
  20. 20. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Going a step further, we will also like to find out the effective interest rate per annum. Table 5: shows the syntax to enter in Excel Syntax = EFFECT (9.78%, 12)Daily Rest = EFFECT (10%, 12)Monthly Rest = EFFECT (10.21%, 12)Annual Rest
  21. 21. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Finally, we will be able to compare fairly the true cost of borrowing. As expected the cost increases as the rest becomes shorter Hence the daily-reducing loan has the lowest effective interest rate.
  22. 22. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance Table 6: Effective Interest Rate (%) Effective Interest Rate (%) 10.23Daily Rest 10.47Monthly Rest 10.70Annual Rest
  23. 23. Join us | Login for Financial Advisors | SMS us at +65 – 9782 - 8606 Home Loan | Commercial Loan | Refinance Loan | *Financial Planning | *Insurance About Property Buyer Mortgage Consultants Property Buyer Mortgage Consultants is a research focused independent mortgage broker. We emphasize a consultative approach where we match our client’s financial situation with the best fit mortgage loan, not simply a cheap loan. We also help property buyers in their buying process helping them avoid pitfalls from unscrupulous property agents. (We are not property agents, therefore there is no conflict of interests.) We also developed our proprietary home loan reporting tool which provides amongst other things, 23 years Sibor history as well as 6 years worth of SOR. Our service is free to you as banks pay us a commission on loan deals completed. Banks in turn save on staffing cost as we are not on their payroll. www.PropertyBuyer.com.sg/mortgage www.SingaporeHomeLoan.net www.iCompareLoan.com/consultant/

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