Suppose you are a mortgage advisor advising your client on choosing between a 25-year CPM loan and a 25-year CAM loan. The loan amount is £300,000. The annual percentage rate is 8% initially and kept unchanged until the end of year 10.
What would be the loan’s balance at the beginning of year 11, interest payment in January of year 11 and amortization in January of year 11 for CPM and CAM respectively?
What would be the total payment, principal repayment and interest costs, of CPM and CAM respectively? Which is higher and why?
What would be the effective cost of CPM and CAM respectively? Which is higher and why?
Contrast the two mortgage products with your results obtained above, with regard to the features of CPMs and CAMs. Advise your client accordingly. If the client can switch from CPM to CAM or from CAM to CPM at the beginning of year 11, how would you advise?
