Question 1

Geoff and Linda live in Glasgow. Both are teachers, with Geoff in full time and Linda in part-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 Geoff and Lindas 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

1.1Using the information provided in Table 1, complete the couples balance sheet for June 2020. (4 marks)

1.2Explain the factors Linda and Geoff might have considered in choosing a repayment mortgage over an interest-only mortgage in 2018. (3 marks)

1.3Using the financial ratios and other relevant information, compare the couples financial situation in June 2018 and June 2020, and explain whether you lean towards their home improvement idea. (4 marks)

1.4Briefly explain two other possible actions they could take to improve their financial situation. (4 marks)