Question

2. Aaron, 34 and Rita, 31 considering to buy their first house. The couple has two kids. Aaron and Rita currently working in Kota Kinabalu. Their current combined gross annual income is RM65,000. They own two cars with a hire purchase balance of RM32,000. They have a total assets worth RM35,000, which are mostly savings for retirement. Rita has always been cautious about spending large amounts of money, but Aaron really likes the idea of owning their own home. They do not have a budget but they do keep track of their expenses, which amounted to RM55,000 last year including taxes and rental expenses(RM750 monthly). They pay all credit card bills on a monthly basis and do not have any other debt or loans outstanding. Other than that, they do not spend a great deal of time tracking their finances.

a. What financial statements should Aaron and Rita prepare to begin realizing their home purchase goal? What records should they use to compile these statements?

b. Use worksheets to calculate their net worth and income surplus. How does renting a house will be differ from owning the house as far as these statements are concern?

c. Calculate and interpret their month’s living expenses covered ratio and their debt ratio.

d. Aaron and Rita has an option either to buy new under development property from the developer or buying a complete house from the existing owner. Discuss how this options will be differ from each other.

e. The couple decide to buy house and agree either to individually or jointly apply for the bank loan. Advice the couple by suggesting at least three properties available in the market and based on the option of mortgage facility from three commercial bank of your choice. Calculate the maximum price of the house that they can afford based on their financial standing and your selected three commercial bank terms and conditions.

Answer 1

Step 1:

They should prepare an Income statement and Balance sheet to get an accurate picture of financial health.

To prepare an income statement Aaron and Rita have to keep all the information related to their income and expenditures. They will need to keep record of all the expenses, including fixed, variable, all sources of income, and all long and short term payment.

Information related to their assets and liabilities will enable them to determine the value of net worth. To further analyse the financial condition, they can flow their ratios. This work of record keeping will also enable them to prepare a financial budget to achieve future financial goals.

b) Step 1

Net worth is the value of everything you own after paying all the debts. It is also known as share holder's equity.

So net worth is Assets- Liabilities

Total assets= RM 35000

Liabilities= RM 32000

Net worth= Rm 35000- Rm 32000= Rm 3000

Surplus income is the income that is left after paying all the expenses and taxes to government.

Total income= RM 65000

Total expenses after paying taxes=Rm 55000

Surplus Income= Rm 10000

Step2:

Rental expenses will shown in income statement as an expense @ Rm 750 every month equating = Rm 9000

If they own the house the value of house will be shown as assets in their balance sheet and there won't be any expenses charged in income statement.

C. The formula for month's living expenses covered ratio is :

Monetary assets/annual living expenses/12

Monetary assets= Rm 3000(assuming assets remaining after paying liabilities is monetary assets)

Annual living expenses= Rm 55000

=3000/55000/12= 0.65 months

An individual should have 3-6 months of expenditures in order to cover the contingencies of unexpected event. Their monetary savings is inadequate to cover emergencies needs.

Debt ratio is a solvency ratio that measures a firm's total liabilities as a percentage of its total assets. In a sense, the debt ratio shows a company's ability to pay off its liabilities with its assets. In other words, this shows how many assets the company must sell in order to pay off all of its liabilities.

So debt ratio here is total debt/total assets which is= Rm 32000/ Rm 35000= 0.91

Means assets are sufficient to pay debt.

d. Purchasing from developer: They can save a significant amount of money by choosing a development property. They can avoid paying transfer duty on the property.With a development property they get to choose your property layout, size and finishes. They won’t need to live with someone else’s unfortunate décor choices.New developments make provisions for the latest technology and enhancement. Things like wiring for your high speed internet connection, alarm systems, sound proofing and insulation are taken into account and added to your property

While purchasing from owner directly they won't have their option to choose the décor and make the home as they want. Further they will have to pay transfer duty.