Reply: 1.1.1.2
From: Rolf Latham
Hi Gail
DSR as Rob Mentioned is Debt Service Ratio.
Many lenders still use this method of assessing if you can SERVICE your DEBTS.
Basially they take your gross income, and allow you to use from 30 to 50 % of that to service debt. So if you gross 4000 a month a minimum of 1300 a month can be used to calculate the amount of loan you can service combined with all your other debts.
Rents are usually added to the 1300 above on the basis of between 70 to 100 %. So if you get 1000 a month in rent, even the stingiest lender will add 700 to you Debt Service Capacity and therefore you have up to 2000 a mont to use toward servicing debt.
Most lenders have a cash flow based model these days. Those work on the basis of assigning certain basic living costs to your ACTUAL situation (like how many kids ro you have, cars et cte ct) and uses the poverty line as having the absolute minimum left over to live off.
The trick for new players is to work out which of the lenders models best suits YOUR scenario and to set up your structure accordingly.
There are serious differences of 100 000s of capacity in the xtrme situations even between just the big 4s models.
Do the homework and it just might scare you.
The other issues id like to raise here is that if you are in a situation where you have excess equity over your serviceability, and you want to borrow more, it is very important to get the structure right from the start, and if needed use a lender that will allow 100 % of annuity income, or structure deals so that you can make use of low docs products.
Many of these are now below 7 % and not as prohibitive as they used to be. Indeed there are products which are normal lines of credit with an ~1 % mark up from their standard rate. If you can later show income that services the loan, they will lower the rate to the normal rate.
One could go on for ever and a day to cover every eventuality. Unfortunately NO software or system can cover all the evntualities so you just have to to do the work or use someone else's experience to do it with you.
Ta
Rolf
