Your friend, Leah Nomvete, has just been employed as an economist. Fortunately, her father only last year gifted her with a car on her 22ad birthday, exactly eleven months ago. Ms. Nomvete currently lives with her parents in a neighborhood south of the city. Her target is to move to the northern suburbs in her own three-bed house on her 30th birthday. In the meantime, she plans to set aside an equal amount of money on a monthly basis to enable her to achieve this goal. Lately, she has been following property prices in the neighborhood of her interest very closely. Her boss, a renowned property investor, recently closed a deal on a property with design and features similar to what she has in mind just for ZAR 2,368,228 in that same neighborhood. Properties in the neighborhood have been appreciating at an average compound rate of 3% per year over the last several years. Property market analysts believe that this situation will prevail into the foreseeable future. Ms. Nomvete plans to save the same amount of money at the end of every month beginning the first month of her 23-d birthday. She has identified a fund that currently pays interest at the rate of 6.5% per year, compounded monthly, on a savings plan.
Required.
a. How much money does Ms. Nomvete have to save each month to enable her to achieve the objective of owning her residential property at the end of her 30 birthday?
b. Suppose Ms. Nomvete has decided that she will partially finance the purchase by borrowing a loan from a bank on the terms 80% loan-to-value ratio (LTV) on her 305 birthday. This means that the bank can extend a loan amounting to not more than 80% of the property’s value. The interest rate on residential loans is expected to be 11% per annum with equal monthly instalment payments over 25 years. Further, Ms. Nomvete will have to pay legal costs amounting to 2% and bond fees amounting to 1% both based on the property value at the time of purchase. Since these costs cannot be borrowed, Ms. Nomvete must have adequate cash to pay for them separately. Her employer has promised to top up her savings by paying into the fund, on her 26* birthday, 30% of the amount accumulated as of that date.
