The original case study of Joanne and Warwick case study

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.

Whilst living overseas, Warwick made regular contributions to a provident fund, now worth $90,000, which he has been able to redeem once he relocated back to New Zealand. Joannes parents also gifted $20,000 to the couple for a home deposit. Warwicks base salary in New Zealand is $70,000 p.a. plus expected bonus of $20,000. Joanne has earned $10,000 over the past six months from casual relief work at her parents framing business.

Joanne and Warwick would ideally like to find a house with some renovation potential that can be improved to meet the needs of their family. They would like to have their property paid off by the time they retire and are considering a loan term of 20 years.

The couple are seeking residential lending advice to help them achieve their goal. The lending organisation has referred them to yourself as new clients based on their initial enquiry for a loan amount of $490,000, which together with their savings of $110,000 could enable them to purchase a property worth $600,000.

1)

Client Parameters

Joanne and Warwick case study as above, They now own their own home in Wellington. Since owning it for four years, it has increased in value from $600,000 to $720,000. In addition, Joanne and Warwick have made principal and interest repayments and reduced their mortgage from $490,000 to $450,000. Joanne has recently returned to the workforce full-time and their gross household income has increased. Joanne and Warwick have now started to think about asset accumulation and have approached you about purchasing an investment property, which they will rent out.

Prepare an Advice Record based on the understanding that the clients are seeking an investment property and wish to use the equity in their own home (per the parameters noted above).

You can make your own assumptions regarding:

household gross income (e.g. an increase of 25% would be $137,500 per annum)

cash flow

type, location and rental yield of the investment property (e.g. a unit in Christchurch costing $450,000 and renting for $330 per week)

any other items that you wish to build into your scenario for the purpose of your Advice Record.

Make your Advice Record current with items (such as real property listings) which you can research and include in the appendices.

Once you have completed the Advice Record, refer to the sample Application Form. You will be using this to explain to Joanne and Warwick that there exists a consistent approach to the provision of verification information for a formal loan application. On this basis it is best for Joanne and Warwick to be aware so they can pre-prepare for some of the requirements of the application.

Advice Record Preparation

Your Advice Record should document key information including the clients financial goals and objectives, the financial strategy and recommendations, and the expected outcomes. It is a legal requirement that the Advice Record is clear, concise and effective as it becomes the record of actions taken and the justification for taking such action.

The Advice Record should, as a minimum, satisfy the following objectives:

Confirm the clients needs, objectives and financial situation: this will include a summary of the clients current situation, a cash flow analysis, assets and liability tables, attitudes to investment risk and specific objectives and concerns.

This data is to provide the base on which the lending strategies can be built.

Explain the recommended strategies and products: this will explain the recommendations and the rationale for the choice of loan product. The strategies will be backed by an explanation of how the loan product recommendations will address the clients objectives.

Explain the implementation of the recommendations and issues for the clients consideration: this will describe the costs and fees to implement the advice, and how the recommendations will be implemented.

Remember to uphold the authenticity of the Advice Record and include as part of the lending organisations policy requirements a place for the client to sign (to accept or amend the recommendations). Also, a policy statement as to how conflicts of interest have been managed and a policy statement regarding procedures for complaints management can be included where appropriate.

Ensure the layout of the Advice Record is presented in a professional manner, and that the language used is suitably detailed to enable the client to understand the scope and outcomes of the service and provides sufficient disclosure for the purposes of clients reliance.

Word limit: 2,000 words

Use the following Advice Record Outline below as a guide to complete your Advice Record.

Assessment item	To be completed
(a) Identification of advice providers* (1 mark)	TO BE COMPLETED (a cover sheet headed Advice Record and the name and contact details of the adviser and any lending organisation being represented)
(b) Executive summary (8 marks)	TO BE COMPLETED Note: There should be sufficient detail to allow the clients to make a decision (appropriate to the level of financial understanding of the clients).
(c) Clients current position (2 marks)	TO BE COMPLETED
(d) Clients needs and objectives (2 marks)	TO BE COMPLETED
(e) Summary of the clients attitudes to investment risk* (2 marks)	TO BE COMPLETED
(f) Scope of the advice* (2 marks)	TO BE COMPLETED
(g) Recommended strategies* (4 marks)	TO BE COMPLETED (provide minimum of two (2) conceptual alternatives)
(h) Other recommendations* (1 mark)	TO BE COMPLETED (add any ancillary items such as income protection or life insurance)
(i) Product recommendations* (4 marks)	TO BE COMPLETED (provide minimum of two (2) real product options)
(j) Costs and fees* (2 marks)	TO BE COMPLETED (provide a sample of researched costs and fees to reflect industry expectation)
(k) Ongoing service and reviews* (2 marks)	TO BE COMPLETED
(l) Implementation schedule* (2 marks)	TO BE COMPLETED
(m) Appendices/ Attachments (2 marks)	Ensure the calculations, spreadsheets and projections are relevant to the advice This might include cash flows, property growth projections, asset selection, assumptions (such as interest rates and the overall macroeconomic environment), locational research, and property listings. Note: Any assumptions that have been used to make projections and estimates (e.g. inflation) should be clearly stated in a disclaimer so that the clients can take them into account.
(n) Annexures Policies (2 marks)	Include research of a specific policy example that may be relevant, such as no conflict of interest or complaints and disputes

* Note: Make your own reasonable assumptions for all necessary items other than those provided with the noted client parameters. These can be further explained as part of the Advice Record presentation.

2 )

Complete the form to the extent that you are able based on the information you already have and identify where further information might be required or is not applicable. (5 marks)

Prepare a note* to Joanne and Warwick of the additional items/information needed to support the application. (5 marks)

* The note can take the form of either an email or letter or file note of a verbal conversation. It is important that it is dated so that it can be considered a diary entry.

(b) Joanne and Warwick query whether they would be applying as a couple or just Warwick as an individual.

Explain the recommended ownership structure and reasoning, and one (1) advantage and one (1) disadvantage of this ownership structure. (2 marks)

(c) Joanne and Warwick query why certain industries and sources of wages/income are specifically required to be disclosed in the section Your Income.

Explain the general reasoning for requiring this disclosure. (2 marks)

(d) Joanne indicates that she might be unable to provide an IRD tax summary due to her recent employment status not extending over the close of a tax year.

What are two (2) other options she can use to verify her income? (2 marks)

(e) You advise that applying for a loan to purchase an investment property would require consideration of the income potential of the proposed purchase.

What two (2) items of supporting information might Warwick and Joanne be able to provide to assist the application? (2 marks)

(f) The couple have identified a property they wish to purchase and have procured a draft copy of the sales/purchase contract.

What action might you recommend to the couple before submitting an offer? (2 marks)