Debt to Service Ratio

[muppet]

Calling all Mortgage Brokers

Hi Guys/Gals

DSR - Debt to Service Ratio.

I would like its significance explained and how each banks criteria differs when the banks are considering a loan please?

Regards

[Marcus]

How it is calculated and some examples would be great too.

Thanks in advance.

[RentMaster]

This is a formula I found on the internet some time ago. Does anyone know if this is correct?

loan repayments / ((other income * 0.3)+(rental income * 0.80))

This indicated your ability to repay loans. Lower is better. Other income is like the income you get from your day job or shares etc.
The way I read that is the calculation assumes 80% of your rental income and 30% of your other income is surplus to use to pay the mortgage with.

[Souljah]

Hi

My understanding is that you take your loan or proposed loan repayments and other debts (credit card limits, HPs other loans) - basically all the money you use to service "debt". Then divide this by your gross income. Remember to load the mortgage interest rates by 1.5% (to allow the for a change on the market).

This will give you your debt servicing ratio = the majority of lendes will allow you to go to a max of 35%. Or 35% of your gross income can be allocated for servicing debt(s).

Hope this helps

[SteveV]

Hi,

My understanding is that the Debt Service Ratio (DSR) is the amount of rental income for each dollar of interest paid. For example, a debt service ratio of 1:1.4 means that you get $1.40 of rental income for every $1 of interest paid.

Steve

[RentMaster]

I found the formula again on somersoft

Debt Service/Coverage Ratio
DSR (or DSCR) = (total rental income X 80%) + (gross income X 30%)/total repayments

This might be the Jan Somers formula. It is apparently from her book.

[Marcus]

I have sent an e mail through to Raewyn one of our resident brokers. Hopefully she can shed some more light on matters, especially with regards to meeting the criteria of different banks.

Regards.

[Rae]

Hi Everyone,

Sorry for the delay, now with regards to Debt to Service Ratio, the significance is to show what proportion of disposable income is available to service all levels of debt.

As commented, different lenders have different percentages, these would range from 30%- 40% across all the major lending institutes due to their criteria.

Now how is this calculated? well,
The combined total of loan servicing and fixed financial commitments less any scaled rental received, divided by gross reliable income, multiplied by 100
For example:
Fixed outgoing per month =$950.00
Less scaled rental (if any) - $250.00
= $700.00
Divided by G.R.I per month $3,333.00 x 100 = 21% DSR

Now using ASB criteria as an example:
Where the Loan to Value Ratio (LVR) is less than 80% the DSR must not exceed 35% if the applicants gross income is less than $20,000 pa and the LVR is less than 80% the DSR must not exceed 25%

I hope this helps!
Rae

[MobileMortgage]

Just to add to Raes excellent detailed post,
The serviceability ratio will be calculated at the benchmark rate which at the moment in Australia is approx. 8.7%, however, if you have a discounted rate e.g.: 0.7% , some lenders will deduct this from the benchmark rate when calculating loan repayments, hence maximizing borrowing power.

The percentage of Rental income excepted for inclusion towards loan serviceability will vary from 80% to 60% depending on the lending institution,
Credit card maximum limits will be calculated at 2% to 3% per month regardless of the outstanding balance amount.

Regards
Steven

Mortgage Broker
Ph: 0402483216

[cube]

Now how is this calculated? well,
The combined total of loan servicing and fixed financial commitments less any scaled rental received, divided by gross reliable income, multiplied by 100
For example:
Fixed outgoing per month =$950.00
Less scaled rental (if any) - $250.00
= $700.00
Divided by G.R.I per month $3,333.00 x 100 = 21% DSR

Is the GRI really Gross, i.e. $40,000 per year before tax, or is that the Gross After Tax amount (if such a thing can exist?)

cube

[RentMaster]

... less any scaled rental received...

What is SCALED rental received?

[wada]

Hello,

In 'The complete guide to residential property investment in NZ' by Lisa Dudson and Andrew King have this formula:

Loan payments divided by eligible income. It states that as long as the result equals 1.0 or less the banks should be happy with your serviceability. Lenders generally use 30-35% of your own income and 80% of rental income. They use the following example:

1) Home mortgage 10K
2) Annual income 50K
3) Want to buy IP for 100K at 100% finance with 8% interest rate (8K per year)
4) IP would bring in $9000 gross rent

Debt servicing would be: 10K + 8K = 18K
Eligible income: 50K x 30% + 9K x 80% = 22.5K
DSR is 18K divided by 22.5K = 0.8

They do state that the DSR is calculated differently by lenders but the principal is the same.

Wada

[paulette]

Hi guys

My lender as I recently found out, uses 75% of your income as well as rental income against all of your expenses, if there is a surplus they are happy. They also only use 75% of the houses value for security. I think most banks use 80% before you have to start paying equity insurance.

Paulette