Team Business Report PDF

Preview

Summary

Download Team Business Report PDF

Description

Team Business Report Team #161

BTF1001

Table of Contents Executive Summary

3

1

Best Home Loan Rate

3

Money Needed to be Borrowed

3

Deposit Needed for Home Loan

4

Periodic Loan Payment

4

Income changes

5

Best Term Deposit Rate

6

Future Value of Investing in Term Deposit

6

Paying Deposit In The Future

6

Conclusion

7

Appendices

8

Executive Summary Our team of financial planners understand that Mr and Mrs Monash have intentions to purchase a house in three years time. The house which they intend to buy has 3 bedrooms, is

2

located in Caulfield, Victoria, and costs $1,350,000. In this report, the following information will be provided to Mr and Mrs Monash: - The cheapest home loan in the market that meets their conditions - The amount they need to borrow - The deposit needed for the home loan - The best term deposit in the market that meets their conditions - The future value of their term deposit

Best Home Loan Rate Our team understands that Mr and Mrs Monash would like to carry out a loan with the following conditions met: - The loan is not from a Big 4 Bank - The loan needs to have a redraw facility - They will make fortnightly repayments for 20 years - It is a fully amortizing loan - It is a variable rate loan - The loan has an LVR of 85% - And it has the lowest comparison rate According to comparethemarket.com.au 1, the best home loan for Mr and Mrs Monash would be Bank of Melbourne, who offer a comparison rate of 2.56% (see appendix A).

Money Needed to be Borrowed We have been notified by Mr and Mrs Monash that they have a desired Loan-to-Value Ratio (LVR) of 85%. The LVR is the percentage of the property price that Mr and Mrs Monash will need to borrow for their home loan. This is calculated by the following formula: Cost of the House x LVR = Money Needed to be Borrowed Applying this formula we find: $1,350,000 x 85% = $1,147,500 Mr and Mrs Monash will need to borrow $1,147,500 for their home loan.

Deposit Needed for Home Loan

1

Compare the Market. 2021. Compare Home Loans. [online] Available at: [Accessed 14 May 2021].

3

We understand that Mr and Mrs Monash will require a home loan deposit to secure the home. That is, an initial deposit to the purchase price of the home, which can be calculated using the following formula: Purchase Price of the Home x (1 - LVR) = Deposit Needed for Home Loan Applying this formula we find: $1,350,000 x (1 - 0.85) = Deposit Needed for Home Loan $1,350,000 x 0.15 = $202,500 Mr and Mrs Monash will need to deposit $202,500 in 3 years.

Periodic Loan Payment As part of the loan Mr and Mrs Monash will have to make periodic loan payments every fortnight for 20 years. The payment they must make each fortnight can be calculated using the following formula:

Substituting in the following val0.098..%, and N=520, we find:

ues, of PV = $1,147,500, i =

PMT = $2,802.71 That is, Mr and Mrs Monash will have a loan payment of $2,802.71 every fortnight for the 20 years until the loan is paid off.

Income changes

4

Mr and Mrs Monash!s income changes by the current rate of annual inflation and according to the rba.gov.au 2, the current rate of annual inflation is 1.1%. The future income of Mr and Mrs Monash in 3 years can be calculated using the following formula: FV = PV * (1+i)^n Applying this formula we have: FV = $1200*(1+0.011)^3 = $1240.04 Hence, the future income of Mr and Mrs Monash is $1240.04 in 3 years time. However, the loan repayment every fortnight is $2802.71. Therefore, with the income growing at 1.1%, Mr and Mrs Monash cannot afford the periodic loan repayment needed for the loan. In order to make the income meet the loan repayment required, Rate of Growth can be calculated using the below formula: R = (L/P)^(1/n) - 1 With L = Loan repayment = $2802.71, P = Present value = $1200, n = 3 years, we have: R = ($2802.71/$1200)^(⅓) - 1 = 0.3267 = 32.68% Thus, the income must grow at 32.68% to be suitable for the loan in the future.

Best Term Deposit Rate Mr and Mrs Monash have $110,000 to invest in a term deposit. However they have the following conditions: - Interest must be calculated and paid semi-annually - The term deposit must be offered from a non big 4 bank 2

Reserve Bank of Australia. 2021. Measures of Consumer Price Inflation. [online] Available at: [Accessed 14 May 2021].

5

According to Canstar 3, the best term deposit rate available to invest Mr and Mrs Monash!s $110,000 for a period of 60 months at a non-big 4 bank is from Bank of Us at 0.85% p.a. (see Appendix B).

Future Value of Investing in Term Deposit In order to find the future value of their investment and the maturity of the term deposit we will use the following formula: FV = PV(1+i)^n Through using the initial deposit available and requirements to their desired term deposit, with this formula we are left with FV = 110,000(1+0.0425)^6 Resulting in a future value of $141,204.67 Hence, leaving Mr and Mrs Monash with $141,204.67 saved when it comes time to buy their house

Paying Deposit In The Future The deposit required for Mr and Mrs Monash!s home loan is $202,500 in 3 years and the investment amount of Mr and Mrs Monash now is $110,000 so they do not have enough now to pay for the deposit in the future. With the term deposit investment, they still cannot save enough for paying their deposit as they save $141,204.67 but the deposit required is $202,500. Ultimately, they would be $61,295.33 short of being able to afford the home loan deposit following their investment. The percentage amount that Mr and Mrs Monash are short can be calculated by the under budget percentage that uses the following formula: (Deposit Required - FV)/Deposit Required

Applying this formula we find: Under Budget percentage = (202,500 - 141,204.67)/202,500 = 0.3027 3

Canstar. 2021. Term Deposits. [online] Available at: [Accessed 14 May 2021].

6

= 30.27% Hence following their term deposit investment, Mr and Mrs Monash will be 30.27% under their home loan deposit in 3 years.

Conclusion To summarise, our financial planners have found the following information for Mr and Mrs Monash in regard to their intention to buy a $1,350,000 house in 3 years: -

The best home loan that meets their conditions is Bank of Melbourne at 2.56% They will need to borrow $1,147,500 for their home loan Mr and Mrs Monash will need to deposit $202,500 in 3 years Periodic Loan repayment is $2,802.71 every fortnight Their income must grow at 32.68% to be suitable for the loan in the future The best term deposit that meets their conditions is Bank of Us at 0.85% The future value of the term deposit is $141,204.67 The term deposit will leave them 30.27% under budget for their home loan deposit

Appendices Appendix A - Home Loan Comparison

7

Appendix B - Term Deposit Comparison

8

9...