Assignment -
In this assignment, students should identify the main issues related to the realization of "Great Australian Dream", and provide a workable financial plan to realize the "Great Australian Dream". Students are strongly advised to reference professional websites, journal articles and text books in this assignment.
The Case - You are supposed to be a financial adviser, providing professional financial consultancy to your clients. One of your clients is a young technical migrant who has just completed her postgraduate degree and found a job in Sydney/Melbourne with an entry salary of $80000/year. She wishes to purchase a house to realise her "Australian Dream", for which she has saved $50000. Ideally, the purchase should happen within 10 years. However, she knows that Sydney/Melbourne housing price is very high. She is not sure how she can afford to purchase a house in Sydney/Melbourne. Your task now is to work out a financial plan for her that can guide her to her target.
You are required to do the following:
1. Investigate the historical housing price data for Sydney or Melbourne and make an appropriate forecast of the housing price for the next 20 years. Clearly state the assumptions you make in order to obtain the forecasts of housing price and justify your assumptions by providing convincing arguments. Historical housing price data are available on the ABS website.
2. Investigate the historical income data for Sydney or Melbourne and make an appropriate forecast of the income of your client for the next 10 years. Clearly state the assumptions you make in order to obtain the forecast and justify your assumptions by providing supportive arguments.
3. Calculate the net income of your client, given that she is single and does not have dependent. You can use the ATO tax Calculator to determine the net income. Make a realistic assumption on the monthly expense of your client and determine the capacity of monthly repayment of your client. Find out the most favourite current home loan rate, and determine the maximum amount your client can borrow at the best rate.
4. Usually, a bank will finance only up to 80% of the property value, i.e. the buyer needs to pay upfront 20% of the property value. Alternatively, if the upfront payment is less than 20% buyer needs to pay mortgage insurance. When purchasing a property you need also to consider the stamp duty that is associate with property purchase. You can determine the amount of stamp duty with online stamp duty calculator. What is the house price your client can afford now?
5. If the current financial situation of your client cannot afford a house, please work out a financial plan that will guide your client to realize her "Australian Dream", where you need to consider how your client can invest her savings to achieve the target of upfront payment plus stamp duty. You need to provide a plan with 20% upfront payment and an alternative plan of 5% upfront payment plus mortgage insurance. Here you need to consider that the property price is changing following your answer in task 1 and hence the saving target is changing with time, and the income of your client is also changing with time following your answer in task 2. Use an excel table to show how the target will be achieved and when the house purchase can take place.
6. Since current interest rate is at its historically low. In the coming years, the mortgage rate may increase to 7% and stay at the level for several years before it goes down again. Assuming that the mortgage rate will increase to 7% in the third year after purchasing the house, what is the impact of the increased interest rate on your financial plan? Show the impact on the excel table of your financial plan. Can your client withstand this increase in interest rate? How would you advise your client to manage this risk?
7. Based on your analysis above, write a report with financial plan to your client detailing what are the assumptions underlying this financial plan, when the "Austrian Dream" can come true, and what are the potential risks entailed by the assumptions and how the risk is managed in the financial plan.
Key tasks to be completed -
1. Forecast the housing price in Sydney/Melbourne
2. Forecast the income development
3. Predict the net income of your client
4. Determine the upfront payments and purchase costs, depending on the proportion of the upfront payment
5. Work out the financial plan showing how to realize the "Australian Dream" for your client.
6. Risk assessment of the financial plan
7. Report detailing the financial plan
8. Final Submission of Complete Assignment