Case study: Joanne and Warwick

Joanne and Warwick are returned expatriates seeking to purchase a house in Wellington for $600,000. Joanne, age 35 and Warwick age 40 have recently had their first child.

While living overseas, the couple had been concerned about the rapid rise in house prices in their home country and wished to purchase a home as soon as possible. They feel the longer they delay, the less affordable the property market will become.

Warwick has been employed by a multi-national company as a bio-medical engineer based in Singapore for the past five years. The company has enabled his transfer to the New Zealand office branch as the country is promoting innovation in the field of medical technology. However, this is on the basis that he is re-employed by the local branch. Joanne was not employed in Singapore but took the opportunity to further her education in art history and valuation.

The family has now been re-domiciled in New Zealand for six months and have been staying in a rental unit near Joannes parents house which has been costing them $575 per week. To assist with any ad hoc expenses such as the cost of relocation, childrens items and furnishing of the unit, the couple organised two credit cards each with a spending limit of $2,000. On average, they make payments of $80 per month on each card which takes care of irregular or ad hoc expenses not included in their normal living expenses. In addition, they also have car loan repayments of $175 per month. Their recurrent weekly living expenses (food, clothes and entertainment) are estimated at $400, excluding their motor vehicle which is budgeted to cost them $200 per month for insurance, servicing and registration and $240 per month for fuel.

Commitment	Monthly	Household income	Monthly
Home loan		Gross annual salary
Credit cards (limit $2,000) 2	$160	Expected annual bonus	$1,667
Car loan	$175	Supplementary income	$1,667
Total financial commitments		Total household income

Commitment ratio 30.0%

Starting with the Gross annual salary you can then determine the Total household income. Following this you can resolve the Total financial commitments. Once you have determined the Monthly home loan amount, apply the net income methodology to identify the surplus which provides an expenditure cover of 30%. To determine the net income, you assume a tax provision of 26.5% of the total gross household income.

Household income	Monthly	Expenditure	Monthly
Gross annual salary		Proposed home loan
Expected annual bonus	$1,667	Credit cards	$160
Supplementary income	$1,667	Car loan	$175
Gross income		Car running costs
Less tax est. 26.5%		Living expenses
		Est. home rates/insurance	$400
Net income		Total expenditure
Surplus

Expenditure cover % 30% (Hint: surplus as a % total expenditure)

Complete the following calculations with all workings:

What is the total household income amount?

What is the total financial commitment amount, taking into account a 30% commitment ratio? (2 marks)

What is the monthly home loan amount?

What is the total expenditure amount?

What is the net income amount?

What is the surplus amount?

Hi Team Please refer to the case study of Joanne and Warwick I have shortened the case study to post the question.