Loan value against mortgage of a building

Assumptions (not given in the question): rate of interest on capital = 8%; the redemption of capital is by a sinking fund at 5%; total life of the building = 60 years, so the remaining life = 60 − 15 = 45 years. For a loan on mortgage, a bank normally advances about two-thirds (66.7%) of the value.

Annual income

$$\text{Gross rent} = 12{,}000 \times 12 = Rs\ 1{,}44{,}000$$

Outgoings

• Insurance = Rs 6,000
• Repair and maintenance 8% = Rs 11,520
• Taxes 25% = Rs 36,000
• Management 5% = Rs 7,200
• Total = Rs 60,720

Net income = 1,44,000 − 60,720 = Rs 83,280

Land: 1000 × 700 = Rs 7,00,000; interest at 8% = Rs 56,000 Net income from building = 83,280 − 56,000 = Rs 27,280

Year's purchase (8%, sinking fund 5%, 45 years):

$$YP = \frac{1}{0.08 + \dfrac{0.05}{(1.05)^{45}-1}} = 11.593$$

Value of building = 27,280 × 11.593 = Rs 3,16,247 Value of property = 3,16,247 + 7,00,000 = Rs 10,16,247

Loan to be advanced (two-thirds) = 2/3 × 10,16,247 = Rs 6,77,498

Answer: Value of the property is about Rs 10.16 lakh, and a loan of about Rs 6.77 lakh may be recommended.