Assume that you are acting as a financial adviser of a young family currently saving for a deposit to purchase their first home.

17. a) Assume that you are acting as a financial adviser of a young family currently saving for a deposit to purchase their first home. Discuss the affordability programmes available for this family of first time home buyers in the United Kingdom. (20 marks) b) Assume that the family opts for a fully amortizing adjustable rate mortgage (ARM) for 30 years with a teaser rate of 1.5% for the first two years. The family buys a house for 200,000 by making a deposit of 20,000 and taking on a mortgage loan of 180,000. It is expected that the standard variable rate that will apply for this mortgage loan in two years is 3.5%. Determine the monthly repayments for the third year. (25 marks) Assume that due to affordability constraints, the family considers an alternative mortgage product - a price level adjusted mortgage (PLAM). The interest rate on this mortgage is 2% for 30 years. The family makes a deposit of only 10,000 and borrows 190,000. Determine the monthly repayments for the first and the second year assuming a rate of inflation of 2%. Discuss the advantages and disadvantages of the PLAM in comparison to the ARM for the family. (25 marks) d) The family learns about the existing Help to Buy: Equity Loan programme and considers using the scheme to take an equity loan of 40,000, make a deposit of 20,000 and borrow the remaining 140,000 using the ARM described in part b). The family plans to refinance the mortgage loan once the 2-year ARM teaser rate period ends and to repay the equity loan. The home value appreciation for the next two years is expected to be 2% per annum. Outline the main provision of the Help to Buy: Equity Loan programme, in particular the eligibility and repayment rules. Explain the pros and cons for the family of using this scheme. Based in the current example, discuss whether the family should use the equity loan scheme or use the ARM alternative described in part b). (30 marks)