A friend tells you that it is always better to repay your debts at the start of the month, rather than at the end of the month since you will be "saving one month's interest". Test the validity of this theory by doing the following: Determine the monthly repayment on a 20-year home loan for R1 500 000 at 12.50% per annum (compounded monthly) and then answer the following:
1. The monthly payment is R______ if you make payments at the end of the month.
2. The monthly payment is R_______ if you make payments at the beginning of the month.
3. What is the difference in monthly payments?
4. What will your total repayment amount be for each option?
5. Does this prove that it is better to make payments at the start of the month? Explain.
6. Suppose you can only afford to pay R15000 per month (end of month). Suppose the bank allows you to pay this monthly amount for 20 years, but then requires a final "balloon payment" at the end of the 20 years. Calculate what this balloon amount will be.
Compare the loan repayment totals after 20 years.