Rent or buy? The challenge of access to housing
Rent or buy? The challenge of access to housing

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Rent or buy? The challenge of access to housing

4.4 A detailed example: before the purchase

Now return to the previous example of Meiling to explore in more detail the impact on the balance sheet of buying a home with a repayment mortgage. You’ll use the second financial tool that comes with this course, the Balance sheet analyser [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] .

Before Meiling’s house purchase, her finances stood as shown in Table 5. The entries are jumbled in a random order.

Table 5 Meiling’s finances

Item Amount (£)
Current account 2,500
Credit card and store card debts 1,000
Savings accounts (instant access) 50,000
Shares 3,500
Family heirloom (a painting) 7,000
Student loans 6,500

Your task in the next activity will be to sort them more systematically and draw some conclusions from them!

Activity 12 Assessing a simple balance sheet

Timing: Allow about 10 minutes

Open the Balance sheet analyser. To run this calculator, you need a version of Microsoft Excel or its equivalent.

Enter the data from Table 5 into the Balance sheet analyser.

Discussion

As shown in Table 6, you should make the following entries, leaving the other amounts set to ‘0’.

Table 6 Meiling’s finances before buying a home

Assets
Liquid assets
Cash 0
Current/Deposit account 2,500
Instant access savings account(s) 50,000
Debts owed to you and repayable within one year 0
Total liquid assets 52,500
Other assets
Savings account(s) (locked in for one year or more) 0
Gilts and corporate bonds 0
Investment funds other than savings invested in bonds 0
Shares 3,500
Investment funds other than savings invested in shares 0
Home 0
Other land and buildings 0
Investment funds other than savings invested in property 0
Collectables (e.g. antiques, paintings) 7,000
Debts owed to you and not repayable within one year 0
Other financial assets 0
Total other assets 10,500
Total assets 63,000

Liabilities

Short-term liabilities
Overdraft 0
Credit card and store card debts 1,000
Household services used but as yet unbilled 0
Taxes (e.g. income tax, council tax) due but as yet unpaid 0
Other debts you owe and repayable within one year 0
Total short-term liabilities 1,000
Other liabilities
Personal loans 0
Amount outstanding on hire purchase agreements 0
Mortgage 0
Other secured loans 0
Student loans 6,500
Other debts you owe and not repayable within one year 0
Other liabilities 0
Total other liabilities 6,500
Total liabilities 7,500
  1. Comment on Meiling’s net worth, current asset ratio and leverage ratio, suggesting whether each one seems high or low, and what this says about her financial position.
To use this interactive functionality a free OU account is required. Sign in or register.
Interactive feature not available in single page view (see it in standard view).

Discussion

The analyser should be showing the ratios replicated in Table 7.

Table 7 Meiling’s financial situation before buying a home

Net worth / wealth 55,500
Current asset ratio 52.50
Leverage ratio 11.90%

Having saved to buy a house, Meiling currently has high financial net worth. Her total assets exceed her total liabilities by £55,500.

Her current asset ratio is very high at 52.5. This means she would be financially very resilient in the face of a sudden shock to her income such as losing her job, with plenty of liquid assets that could be cashed in quickly and used to clear her short-term debts (the credit card balance).

She has low leverage ratio of 11.90%, which suggests that servicing her debts is unlikely to put much strain on her cash flow. (In fact, the potential strain on her cash flow will be even lower than the leverage ratio suggests because student loans are unusual, being structured so that her repayments would stop if her income fell below a set threshold.)

Keep the Balance sheet analyser open. In the next activity, you will adjust the data you’ve entered so far.

DB125_1

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371