Reference no: EM133173071
Richard is a single parent living in a two-bedroomed semi-detached house in Sunderland. He works as a full-time psychiatric nurse. When he bought the house in October 2019 the mortgage broker talked him through repayment and interest-only mortgages. He decided to use his savings as a deposit and chose a repayment mortgage which, by October 2021, had an outstanding balance of £130,000. The original purchase price in 2019 was £166,000 and the market value of his house has increased by 2% over this period.
In October 2021 Richard earns a net monthly income of £2,200 and his expenditure has averaged £2,300 a month over the last two years. In October 2021 a loan to conduct an initial refurbishment (an updated bathroom) is down from £3,000 to £1,500, but his current account balance has dropped to zero and he has an overdraft on his current account of £1,000. Meanwhile, his savings account holds just £150 and he also owes £2,000 on a credit card. The rest of his balance sheet has not changed since October 2019.
He is reviewing his finances as he would like to take his 8-year-old daughter on holiday abroad.
Table 1 shows his balance sheet and financial ratios in October 2019.
Table 1 Richard's household balance sheet - October 2019
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October 2019 (£)
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Assets (Total)
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168,100
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|
Liquid assets
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2,100
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|
Cash
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100
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Current account
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1,000
|
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Instant access savings account(s)
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1,000
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|
Other liquid assets
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0
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|
Other assets
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166,000
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Home
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166,000
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|
|
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Liabilities (Total)
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141,500
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Short-term liabilities
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1,000
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Overdraft
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0
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Credit card
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1,000
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|
Other short-term liabilities
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0
|
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Other liabilities
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140,500
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Personal loans
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3,000
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Mortgage
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137,500
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|
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Ratios
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|
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Net worth / wealth
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26,600
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Current asset ratio
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2.1
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Leverage ratio
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84.18
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1.1 Using the information provided in Table 1, complete Richard's balance sheet for October 2021.
1.2 Explain the factors Richard might have considered in choosing a repayment mortgage over an interest-only mortgage in 2019.
1.3 Using the financial ratios and other relevant information, compare Richard's financial situation in October 2019 and October 2021.
1.4 Briefly explain two other possible actions Richard could take to improve his financial situation.
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