Question

you are contemplating financing (interest only) on a $10,000,000 shopping center. a lender has offered a 72% loan with an interest rate of 7%. another lender is offering a mortgage loan for 80% ltv, but wants an 8% interest rate. what is the effective interest rate on the additional debt contemplated in the second loan? ch12

Answer 1

The effective interest rate on the additional debt contemplated in the second loan 15%.

Interest on 80% LTV loan = $8,000,000 × 8% = $640,000

Interest on 70% LTV loan = $7,000,000 × 7%= $490,000

Extra interest on additional $1,000,000 loan = $640,000-$490,000 = $150,000.

Effective interest on additional debt

= Additional interest/ additional debt

= 150,000/ $1,000,000 = 15%.

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