Question

In: Finance

a.Steve pays 5.27% interest on a mortgage of $710,000. His gross income is $134,000 p.a. plus...

a.Steve pays 5.27% interest on a mortgage of $710,000. His gross income is $134,000 p.a. plus super of $8,000. His taxation and Medicare liability totals $15,000 pa. Calculate Steve’s debt service ratio (to the nearest percentage point).

If the answer is 25%, put 0.25 in the blank.

b.Chen has $119,000 of his own money to invest. He has a margin loan available to add to this money to purchase Australian shares. The bank’s loan-to-value ratio (LVR) is 86%. How much does Chen have available to purchase a portfolio?

Solutions

Expert Solution

Debt service ratio is total debt service (principal + Interest) / Total net income (after taxes)

Total net income = 134000+8000-15000= 127,000

To compute total debt service monthly EMI or total tenure of mortagage is not given, assumed 20 years tenure for loan

EMI can be computed using the below formula

(P x I) x ((1 + r)n)/ (t x ((1 + r)n)- 1)

in which P is equal to the principal amount borrowed, I is the annual interest rate, r is periodic monthly interest rate, n is the total number of monthly payments and t is the number of months in a year.

Or if you are using excel you can use pmt formula

Using this formula 710,000 loan for 20 years at 5.27% toal EMI per annum comes to 58,283.77

Debt service ratio = 58,283.77/127000 = 0.46

b. Loan to value ratio is ratio bank loan to the value of propert purchased

If Loan to value ratio is 86%, own funds to property value is 1-86% = 14%

Own funds is (14%) 119,000

Total portfolio is 119000/14% = 850,000

Own funds = 119,000 Loan is 731,000


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