Debt Servicing Ratio

From: Stirling Reid



I have most of my loans as Interest only to improve cash flow and also improve DSR.
However on applying for a loan the bank inform me they calculate the DSR at 6.32% and paying back Interest AND principal back over 20 years regardless of the fact that my loans are IO. This means the assumed repayments are 1.39 times a IO loan at 6.32%. Similar banks have similar formulae.
My questions are:
how long have they been using this formula?
Are they being more strict during low interest rates, to allow for when interest rates go up?
When are the banks going to get over the hangup of loans must be repaid in full?
Why is this fact not mentioned in books?
 
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Reply: 1
From: Rolf Latham


Hi Stirling

Its really hard that.

It varies a lot as to what most of the lenders will and wont do.

The basic rule of thumb that most apply is that, at some point the loan needs to be paid pack, so P&I at max 30 years at a rate say 1 to 2.5 % above the current rate.

Different lenders use sometimes totally different serviceability models and change these constantly, so the books cant possibly keep up.


Rolf
 
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Reply: 1.1
From: Stirling Reid



Thanks Rolf

I have checked out your website so I know where to contact you when required.
 
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Reply: 1.1.1
From: Even Steven


It's ridiculous that banks use a formula that assumes repayments are I&P. They don't really want you pay back the principal because if you do they have to find another borrower.
 
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Sim

Administrator
Reply: 1.1.1.1
From: Sim' Hampel


Somehow I don't think they are going to run out of borrowers.

 
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Reply: 1.1.1.1.1
From: Even Steven


Nevertheless they gain nothing by getting the principal back.
 
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Sim

Administrator
Reply: 1.1.1.1.1.1
From: Sim' Hampel


It is simply a risk management tool for the banks. By forcing you to lower your debt levels against a particular property, if you go under and they are forced to sell it, they are more likely to get their money back.

Exactly the same reason why they insist on you paying for their Lenders Mortgage Insurance policy when you borrow more than 80% of the value of the property.

The other factor is that the majority of people use their LOCs for upgrading their car, or a holiday or other such "investments". People who purchase growth and/or cashflow properties would be in the minority when it comes to LOCs.

So it is important for banks to encourage people to pay back the principle, or at least limit their other borrowing capacity knowing that they have spent the money on something which is not an appreciating asset nor one that is making them money.

So once again we people who are trying to make money using the retail banking system suffer as a result of the ignorance and foolishness of the general population.

Opinions only !

Rolf might have some more comments on this area.

 
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