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RBC - Cash Back Mortgage Analysis

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					RBC: Cash Back Mortgage




                    Available on a Variety of Terms
Cashback is available on fixed rate mortgages with terms of 4, 5 or 7 years.
And the amount of money you receive is based on the size and term of your
                     mortgage - up to 7% of its value.
 Source:
 http://www.rbcroyalbank.com/RBC:RCn5mo71A8QAAypuvLU/products/mortgages/
 cashback.html
   RBC: Cash Back Mortgage
               Assumptions
Cash back Mortgage           Conventional Mortgage
• $100,000                   • $100,000
• 5 year term                • 5 year term
• 25 year amortization       • 25 year amortization
• 1% cash back on            • 0 cash back on
  drawdown date                drawdown date
• 7% APR                     • 6% APR
    RBC: Cash Back Mortgage
• To analyze this, we first calculate the correct monthly
  interest rate for each type (cash back & conventional)




  All calculations are shown using keystrokes for the HP 10B calculator
    RBC: Cash Back Mortgage
Now calculate the monthly payments for each alternative:

Cash back Mortgage                 Conventional Mortgage
1   2nd     P/Y (1 Pay/Year)       1   2nd     P/Y (1 Pay/Year)
100,000          PV                100,000          PV
0                FV                0                FV
25 x 12 =        N                 25 x 12 =        N
0.5750           I                 0.4939           I
PMT              $700.42           PMT              $639.81
  RBC: Cash Back Mortgage
Now calculate the balance outstanding at the end of the
five year fixed rate term for each type of mortgage:

 Cash back Mortgage               Conventional Mortgage
 First calculate the              First calculate the
 payment, then:                   payment, then:
 60      Input                    60      Input
 2nd     Amort                    2nd     Amort
 =                                =
 =                                =
 =       $91,044.59               =       $89,836.71
   RBC: Cash Back Mortgage
We can now calculate the implicit interest rate charged by the bank
   for the cash back option.
1. Calculate the difference in monthly payments
2. Calculate the difference in balance outstanding at the end of
   the five year fixed term
3. Calculate the implicit interest rate

     1    2nd    P/Y (1 Pay/Year)
     1,000            PV
     1,207.88 +/-     FV
     60.61 +/-        PMT
     60               N
     I                -?

				
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posted:6/26/2011
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