You work as a Financial Planning Adviser and have been asked to assist with two new clients. You have received background information on each client (see below). Client Name Anna Judy and Stan Age 35 55 and 53 Status Single, owner of apartment Married, joint owners of house Dependents Nil Nil (three children, all adults and living independently) Occupation Consulting Engineer Real Estate Agent (Judy) and Chef (Stan) Net Income (after super and after tax) AUD125,000 per year plus annual bonus AUD180,000 (Judy) and AUD150,000 (Stan) per year Expenses (living and financial) AUD75,000 pa AUD125,000 pa Major assets Cash at bank AUD15,000 Superannuation AUD200,000 Apartment AUD0.85 million Cash at bank AUD25,000 Superannuation AUD150,000 House AUD3.8 million Major liabilities Bank loan for the apartment AUD0.4 million (interest only loan) Nil Major financial goals Purchase a house in the near future Self funded retirement You have had an introductory meeting with each new client to obtain a better understanding of their circumstances, financial goals and risk preferences. Below are some notes from those meetings.  Anna is a senior consulting engineer and was recently made a partner at the firm she works for. - Anna is an independent woman that likes to live alone. She has no children. - She is family oriented and regularly communicates with her parents and brother - all of which live in rural NSW. - Anna is active, in good health and is a member of the local beach surf lifesaving club where she is the leader of the Surf Education and Training team. - Anna is conservative by nature and has no interest in risky investments. Judy and Stan: - Judy and Stan are in the final stage of their working careers. Both are looking forward to a long and comfortable period of retirement. - The house is where they raised their children. The children are now adults and they have families of their own - Judy and Stan enjoy being grandparents. - Judy and Stan like to travel so their retirement plan and spending budget must include some allowance for this activity. - They are not rich but own their house and paid off the bank loan several years ago. - Both Judy and Stan would consider themselves prudent and careful with money - and they are very mindful that regular income from salary will soon come to an end.

Anna has requested your advice in relation to her goal of purchasing a house.  Anna is comfortable living in her apartment but it is too small for visitors to stay.  With a house, there will be plenty of space to accommodate friends and family for extended stays.

 

Anna would like to buy a house in the next few years.  The market price for a suitable house is approximately AUD1.1 million.

 

The bank has indicated to Anna that it would likely approve a loan for 70% of the purchase price.  This means Anna must fund the remaining 30% of the purchase price from her own cash.

 

Anna prefers to not sell her apartment and, after purchasing the house, intends to keep it as an investment property.  As an investment property, the estimated rental income will be more than adequate to continue to service the existing loan.

 

As a partner in the consulting firm, Anna is entitled to an annual bonus payment.  The amount of the payment depends upon the financial performance of the firm for the year.  Typically, the annual bonus is approximately AUD50,000 per partner.

 

If Anna allocates the annual bonus to a savings plan, how many years will it take to achieve the required deposit.  Assume the annual bonus payment is AUD50,000 each year, the first bonus payment is in 12 months time and the interest on the savings account is 3.5% per annum.

 

The proposed new loan will be interest plus principal, monthly repayments, an interest rate of 5% and a term of 20 years.  What is the monthly repayment.

 

Anna is interested in the scope to accelerate the repayment of the loan.  If Anna increased the monthly repayment by AUD1,000 per month, what would be the revised term of the loan (ignore the annual bonus and show the answer in months).

 

Alternatively, Anna could sell the apartment and use the proceeds of sale to repay the existing bank loan and use the surplus as the deposit on the house.  Identify the key differences arising from this alternative in comparison with the original bank proposal.  

 

With reference to the results of your analysis above, make a recommendation to Anna.  In your response clearly set out your reasons.