Mr and Mrs Smith have been happily renting an inner-city two bedroom unit for the last four years. All along, theyve also been well disciplined in saving for a deposit for their own home. With children on the horizon they know theyll need to move out of the unit in the foreseeable future and into a family home. So the Smiths have decided theyre now in the best financial situation to ditch the rental market and take the plunge into the world of mortgages! Unsure of how much they can borrow, uncertain of where to look for the best loan deal and with advice coming from all directions, the Smiths are a little overwhelmed! So they agree to visit you, a home loan banker. The Smiths are elated, they have saved $100,000 for the deposit of their first home. The higher the deposit the less the Smiths will pay in interest over the life of the loan.

Please advise the Smiths on the following:

(a). What is the maximum amount they can borrow on the loan assuming that the margin insisted on the loan by the bank is 20% of the loan amount. (5 marks)

(b). Please advise the Smith's if they will have to take a mortgage insurance. Explain the purpose of the mortgage insurance to the Smiths. Assume that your bank insists on a mortgage insurance for all home loans where a borrowers' contribution is less than 20%. (10 marks)

(c). Advise the Smiths on the suitability of a fixed interest rate loan and a variable interest home loan. The interest rates are expected to decrease in future. Which of the interest rate loans - fixed or variable will you recommend to Smiths? Give reasons. (10 marks)

(d). Assuming that the Smiths have two options: a. $400,000 loan for 30 years at a rate of 3% per annum or b. $400,000 loan for 25 years at a rate of 3.5%, advise the Smiths on the benefits and costs of the loan options. Make a suitable recommendation.