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This document discusses the differences between renting versus owning a home, and floating versus fixed interest rates for home loans. It provides an example where purchasing a $132,000 home with a $1,200 monthly mortgage results in accumulating more equity over time compared to annually increasing $1,000 rent payments. It also explains that floating interest rates can adjust with economic changes, while fixed rates are set for a certain period before potentially changing. Most home loan borrowers prefer floating rates so their payments adjust to interest rate movements in the economy.

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Introduction to business finance
Buying VS Renting Pride of Ownership Appreciation Property Tax Deductions mortgage balance decreases and equity builds mortgage balance decreases and equity builds
The renter starts out paying $1000 per month with annual increases of 5%.The homeowner purchases a home for $132,000 and pays a monthly mortgage of $1,200 +864 +72 1000 1072 7 +252 +21 1000 1021 6 -336 -28 1000 972 5 -888 -74 1000 926 4 -1416 -118 1000 882 3 -1920 -160 1000 840 2 -2400 -200 1000 800 1 Yearly Difference Monthly Difference Mortgage Payment Rent Payment Years
Floating interest rate Loan with a variable or floating interest rate i.e. the interest rate would change from time to time in line with the market changes in interest rates. The nominal interest rate is 5.60% per annum and the duration of the loan is 20 years, and with the changes in economy, the bank will increase the interest rates.
Fixed interest rate Fixed rate loan with the same repayment structure as of the first alternative with a nominal 6.55% per annum which is kept fixed for the next two years while the duration of the loan is 20 years, in two years the new interest rate will be fixed for a future period.
Conclusion When it comes choosing interest rate structure, majority of home loan borrowers go for the floating interest rate loan because you can adjust your cash outflows with the interest rates floating with the change in economy, and if interest rates falls you will benefit from floating interest rates over fixed interest rates.

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  • 2. Buying VS Renting Pride of Ownership Appreciation Property Tax Deductions mortgage balance decreases and equity builds mortgage balance decreases and equity builds
  • 3. The renter starts out paying $1000 per month with annual increases of 5%.The homeowner purchases a home for $132,000 and pays a monthly mortgage of $1,200 +864 +72 1000 1072 7 +252 +21 1000 1021 6 -336 -28 1000 972 5 -888 -74 1000 926 4 -1416 -118 1000 882 3 -1920 -160 1000 840 2 -2400 -200 1000 800 1 Yearly Difference Monthly Difference Mortgage Payment Rent Payment Years
  • 4. Floating interest rate Loan with a variable or floating interest rate i.e. the interest rate would change from time to time in line with the market changes in interest rates. The nominal interest rate is 5.60% per annum and the duration of the loan is 20 years, and with the changes in economy, the bank will increase the interest rates.
  • 5. Fixed interest rate Fixed rate loan with the same repayment structure as of the first alternative with a nominal 6.55% per annum which is kept fixed for the next two years while the duration of the loan is 20 years, in two years the new interest rate will be fixed for a future period.
  • 6. Conclusion When it comes choosing interest rate structure, majority of home loan borrowers go for the floating interest rate loan because you can adjust your cash outflows with the interest rates floating with the change in economy, and if interest rates falls you will benefit from floating interest rates over fixed interest rates.