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On the 4th of August 2016, the Bank of England (BoE) lowered its main interest rate to 0.25%, the lowest on record since the Bank has published rates in 1970, which still remains unchanged. As a consequence of this low level of rates, Virgin Money’s Lifetime Tracker Standard mortgage rate stands at 3.9%. Jeff Green is about to buy a house in the countryside which costs £650,000 and is taking out a 25-year repayment mortgage for 75% of the acquisition value of the house. Jeff has asked you to assess his ability to pay, in case the BoE increases its interest rate, as his maximum monthly payment cannot exceed £3,200. You are required to:
1. Calculate the monthly payment John will need to meet under current conditions.
2. Assess the effect on John’s monthly payments for each quarter percentage point increase in the BoE rate, up to 4% and identify at which rate Jeff would no longer be able to make the monthly payment.
3. Determine the shortest length (to the nearest month) of mortgage Jeff could take out if he wanted his monthly payment to be exactly the maximum he could afford (based on current mortgage assumptions).
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