Liam and Marta live in London. Both are teachers, with Liam in full time and Martart-time paid
Question:
Liam and Marta live in London. Both are teachers, with Liam in full time and Martart-time paid employment. When they bought a flat together in June 2018 the mortgage broker talked them through repayment and interest-only mortgages. They decided to use their savings as a deposit and chose a repayment mortgage, which by June 2020 was standing at £100,000. The market value of their flat had increased by 10% over this time period on the original purchasing price of £110,000.
Together, in June 2020 the couple earn a net monthly income of £4000 and their expenditure has averaged £4200 a month over the last two years. In June 2020 their car loan is down from £4,000 to £2,500, their current account balance has dropped to zero and they have an overdraft on their current account of £1500. Meanwhile their savings account holds just £300. They also owe £3000 on a credit card. The rest of their balance sheet has not changed since June 2018.
They are reviewing their finances as they are considering improving their home by installing a new kitchen.
Table 1 shows their balance sheet and financial ratios in June 2018.
Table 1 Liam and Marta’s household balance sheet – June 2018
June 2018 | |
Assets | 113,120 |
Liquid assets | 3,120 |
Cash | 120 |
Current account | 2,000 |
Instant access savings account(s) | 1,000 |
Other liquid assets | 0 |
Other assets | 110,000 |
Home | 110,000 |
Liabilities | 110,000 |
Short-term liabilities | 1,000 |
Overdraft | 0 |
Credit card | 1,000 |
Other short-term liabilities | 0 |
Other liabilities | 109,000 |
Personal loans | 4,000 |
Mortgage | 105,000 |
Ratios | |
Net worth / wealth | 3,120 |
Current asset ratio | 3.12 |
Leverage ratio | 97.24 |
Using the financial ratios and other relevant information, compare the couple’s financial situation in June 2018 and June 2020, and explain whether you lean towards their home improvement idea.
Financial Markets And Institutions
ISBN: 978-0132136839
7th Edition
Authors: Frederic S. Mishkin, Stanley G. Eakins