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You are considering buying a centrally located three-room apartment in Oslo. The seller’s asking price is 9,000,000 kroner. Assume that this is the price that must be paid if you choose to buy. In this case, your banker offers to finance 75% of the purchase price with an ordinary mortgage at 3% annual nominal interest and amortization (repayment) as an annuity loan over 25 years. The bank’s loan offer presupposes monthly payment of interest and installments, for the first time in one month.

In recent times, you have followed the price development of real estate in Oslo closely. For you, the assessment of buying the apartment is to be regarded as partly an investment, because, among other things, due to expected marital status and career prospects, you will most likely want to sell in 10 years. At the time of sale, therefore, your goal is to own 60% of the apartment.

After long conversations with prominent real estate analysts in Oslo, you feel reasonably confident in the following estimate of annual value development:

Scenario Price-increase probability

Pesimistic: -2%, 10% chance

Most likely: 5%, 70% chance

Optimistic: 8,5%, 20% chance

(a) 10p How much does it cost you a month to service the loan?

(b) 10p If you sell the apartment after five years, do you expect the ownership objective to be met? Explain.

(c) 10p Given the objective of ownership interest and time horizon five years, is it necessary to change the monthly payment on the loan? Explain.

(d) 10p Without changing the loan terms and the objective of ownership interest, when can you expect to be able to sell at the earliest?

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