Reference no: EM133005864

QUESTION - James earns $80,000 per annum and Deborah earns $65,000 per annum. They have an inheritance of $80,000 (currently in a term deposit earning 5% per annum) which they plan to use as their deposit on a new home. In addition, they have $10,000 in a cash-management trust earning 4% per annum.

Their general living expenses are $35,000 per annum. They pay $8,000 per annum in school fees for their son. They have credit-card payments of around $3,500 per annum, and they take a short holiday plus some weekend trips which they believe cost $10,000 per annum. In addition, they pay $22,000 per annum in rent.

Deborah and James have a reasonable level of personal and private medical insurance and have full contents insurance of their furniture. Their bank will lend them up to 85% of the value of a home, but their mortgage payments cannot be more than 30% of their gross income. The interest rate on the mortgage is 6.75% per annum and the term would be 25 years.

They live in Norther Queensland. Property values are expected to increase a little more than inflation over the next few years. They have found two houses they like. Their first preference is a house valued at $650,000. The other is valued at $720,000. As their financial planner, you have completed their cash flow analysis. Your summary notes show that their combined income is $114,763, total outgoings is $78,500 and net after tax saving capacity is $36,263.

REQUIRED -

a) What factors should they consider if they want to buy now?

b) Which house could they afford?

c) What would be their mortgage payments if they decide to buy the cheaper house?

d) Having examined their current situation, what are the issues they need to take into consideration in making the decision.