Question

Liam and Marta live in London. Both are teachers, with Liam in full time and Martart-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 Liam and Marta’s 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

c. Using the financial ratios and other relevant information, compare the couple’s financial situation in June 2018 and June 2020, and explain whether you lean towards their home improvement idea.

Answer 1

• Below is analysis of couple`s financial situation using Financial ratios:
  • Net Worth: Couple`s networth has been increase over the period of two years by 11,300,mainly due to increase in market value of the flat by 10%. It is positive sign of better financial situation.
  • Current Asset Ratio: Couple`s current assets ratio is down to 0.09 in June-2020.which is showing worst financial liquidity situation.Maintainig certain level liquidity is essential to ward off any unforeseen financial hardships.
    • Here,Couple`s monthly shortage is 200 ( 4200 - 4000) as their monthly income is not sufficient to pay off their monthly expense. which is Negative sign of Financial situation.
  • Leverage Ratio: Couple`s leverage ratio is lower by 9.12% compare to June-2018,which is positive sign of better financial situation as this ratio is showing increase in Value of total assets as compare to increase in value of liabilities.
• On the basis of above Analysis,couple should not take decision to improve their home.