Fiona and Waleed would like to buy a house in the next few years. The market price for a suitable house is approximately AUD1.8 million.

The bank has suggested the best approach would be to sell the apartment (for approximately AUD0.8 million), repay the existing bank loan of AUD0.6 million and use the surplus proceeds of AUD0.2 million as the deposit on the house. On this basis the bank indicated it would likely approve a new loan of AUD1.6 million to purchase the house. The new loan would be interest plus principal, monthly repayments, an interest rate of 5% and a term of 25 years.

Review the financial capacity of Fiona and Waleed to service the new loan as proposed by the bank. In your response make sure you take into consideration the period that Waleed will be on extended leave. (4 marks)

Fiona and Waleed prefer an alternative approach that involves the commencement of a savings plan for the deposit and retaining the apartment as an investment property. They acknowledge that this approach will delay the purchase of the house.

Prepare a savings plan for the next four years and estimate the balance at the end of year 4. Assume that 80% of the annual surplus is available for the savings plan. Ignore interest on the savings. In your response make sure you take into consideration the period that Waleed will be on extended leave. (3 marks)

Review the financial capacity of Fiona and Waleed to service the new loan associated with this alternative approach. The terms of the loan and the deposit amount are the same as the original loan as proposed by the bank. Note that the purchase of the house will occur in year 5 (so the period that Waleed is on extended leave is irrelevant). Assume net rental income from the apartment of AUD22,000 per annum. (4 marks)

With reference to the results of your analysis above, make a recommendation to Fiona and Waleed. In your response clearly set out your reasons. (3 marks)