Case study 3 — Ravi and Alice Patel
Background
Ravi and Alice Patel have been thinking about their future and are ready to purchase their first investment property.
They have lived in their current home for 10 years. They would like to utilise the equity they have built up to purchase an investment property in Kingswood, a suburb in Sydney’s west. They believe that the suburb has its good parts and is a growth area. It has a hospital, university and a new shopping precinct under development.
Ravi is a self-employed carpenter specialising in renovations and extensions. Alice is an interior designer and has been working part time since the children came along. With their combined skills they feel that taking on an older property and doing it up themselves will set them up to make a profit and/or build up equity in the short term, which will help them to scale up to their next investment property.
Ravi and Alice have been married for 20 years and have two teenage children. Their son Jay is age 16 and their daughter Zara is age 15. The investment property is located near a university and they feel this may be somewhere Jay and Zara could live while they attend university.
Alice contacted your office following a recommendation she found on a local Facebook group. After the complications they experienced when they got their home loan 10 years ago (as Ravi is self-employed) they decided to let a broker help them out this time round.
You have conducted an initial meeting with Ravi and Alice at their home. Following that meeting the clients have provided the information and documents that you requested — pay slips, tax returns, profit and loss and balance sheet for their company, bank statements, property details for review/verification.
They have been looking at properties for the past five months and have found an older established property set on a large 800 sqm block. It is in need of a new kitchen and the laundry is on the back patio and needs to be built in — to give it internal access, which will help to modernise the home.
The back outdoor decking area is also in need of repair. Ravi is able to undertake these renovations while Alice will paint and decorate.
They have signed a Contract of Sale and paid a 10% deposit. Settlement is due in 60 days.
The following is a summary of the details of the property they wish to purchase, the couple’s financial and employment details, and the loan features they require.
The property
| Address | 3 Premier Street, Kingswood NSW 2747 |
| Purchase price | $660,000 |
| Description | 3-bedroom, 2-bathroom house — 800 sqm block |
| Agent details | James Holmes – Star Partners |
| Agent’s landline | (02) 9148 0025 |
| Agent’s mobile | 0419 147 874 |
The couple
| Current address | 12 Mascot Street, Lidcombe NSW 2141 |
| Ravi and Alice have lived there for 10 years | |
| Home phone | (02) 9784 0454 |
Funds position
| Purchase price | $660,000 |
| Clients’ estimate of statutory costs | $25,000 |
| Total required for the purchase | $685,000 |
| Renovations | $30,000 |
| Loan amount | $715,000 |
| Client’s contribution (the clients wish to borrow 100% of the purchase price plus costs) | $0 |
Use fees and charges applicable to the state of New South Wales. If a servicing calculator you are using requires a postcode, input 2141.
Assets
| Penrith Mutual savings (joint) | $35,000 |
| Penrith Mutual transaction account (joint) | $2,500 |
| Residential property — 12 Mascot Street, Lidcombe | $1,300,000 |
| Toyota Prado 2015 (financed from home loan redraw) | $48,000 |
| Boat — Bar Crusher 2017 | $65,000 |
| Superannuation — Penrith Mutual (Ravi) | $300,000 |
| Superannuation — Penrith Mutual (Alice) | $120,000 |
| Household effects (insured value) | $140,000 |
Liabilities
| Penrith Mutual home loan (joint) | Balance $450,000 (repayments $1800 p.m.) |
| North Bank Visa card (Alice) | $800 (limit $5,000) |
Payments have always been met on time and any prior loans repaid in terms of contracts. The minimum monthly commitment on the credit card should be calculated at 3% of the credit limit.
Living expenses
Annual expenditure for living expenses — $55,000.
Employment and income
Ravi (age 44)
| Position | Company Director – Carpenter |
| Employer | Self Employed – Jayzar Carpentry Pty. Ltd. A.C.N. 48 521 369 |
| Phone | 0419 456 123 |
| Time in business | 15 years |
| Driver’s licence | 789456 |
| Ravi@jayzar.com.au |
Alice (age 42)
| Position | Senior Designer (part time) |
| Employer | Elite Style Pty Ltd |
| Phone | (02) 9741 1254 |
| Income (gross) | $45,000 p.a., monthly gross income: $3,750 |
| Employer contact | Prudence Fairchild – CEO |
| Length of service | 25 years |
| Driver’s licence | 784125 |
| alicep@elitestyle.com.au |
Company information
| Company name | Jayzar Carpentry Pty. Ltd. |
| A.B.N. | 48 521 369 |
| Sole director | Ravi Patel |
| Phone | 0419 456 123 |
| Time in business | 15 years |
| ravi@jayzar.com.au | |
| Company assets | |
| Cash at bank (working account) | $25,000 credit |
| Accounts receivable | $30,000 |
| Ford Ranger Raptor | $68,000 |
| Trades Trailer | $5,000 |
| Tools | $15,000 |
| Liabilities | |
| Penrith Mutual Business Visa facility | Balance $500 – limit $10,000 – balance cleared from working account each month |
| Penrith Mutual Chattel Mortgage (vehicle) | $30,000 owing – repayments $750 p.m. |
| Income | |
| Year 20X1 | Year 20X2 |
| NPBT $100,000 | NPBT $105,340 |
| NPAT $75,000 | NPAT $79,000 |
| Depreciation $8,000 | Depreciation $5,000 |
| Director’s wages $50,000 | Director’s wages $50,000 |
| Interest $1,800 | Interest $1,500 |
Solicitor’s details
Eastern Conveyancing
18 Rocks Road, Sydney NSW 2000
Phone: (02) 9351 8796
Email: easternconveyancing.com.au
The conveyancer has quoted a fee of $1,500 for their services.
The loan requirements
- 25-year term if possible
- interest only variable interest rate (for this case use 4.70% p.a.)
- interest only term five years
- LMI premium to be capitalised onto the loan
- proposed settlement date — 60 days from exchange of contracts.
Other information
- The clients have advised that they do not want to pay ongoing monthly fees on their loan.
- They want to keep repayments as low as possible.
- They want to build equity as soon as possible, yet have asked for an interest only loan.
- They would like to purchase a property at Nelson Bay within the next 10 years to use as a holiday home and plan to retire there.
- Borrowing 100% of the purchase price plus costs
- The property will be vacant for 12 weeks pending renovations.
- They have expressed that they do not have a problem refinancing their current home loan if they need to, as they understand they will need to use their current home as cross collateral security to support the new loan.
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