Like Bill, in question 3 above, Scott has bought a house in Canberra, borrowing the same amount, and on the the same terms. Scott’s bank, however, offers an ‘interest offset’ account facility with the loan. Like Bill, Scott’s first payment is on 19 March 2020. On the day Scott takes the loan of $600 000 out (19 March 2019), Malcolm gives Scott $100 000. Scott immediately puts the money into his interest offset account. This account also earns 3.5% p.a. (compound interest). Over the term of the loan Scott does not put any more money into the interest offset account. The interest offset account pays interest annually, and its first payment will be on 19 March 2020.
a. Draw a cash flow diagram, from Scott’s perspective, that describes the actions of his interest offset account. Scott’s interest offset account pays its interest payments to Scott’s loan.
b. What is the amount of Scott’s total loan repayment on 19 March 2020?
c. Show that Scott can make the total repayments calculated in part b for only 25 years, and that in the 26th year Scott will only pay a reduced value, how did you reach this value?