As we all know, buying a new property can be extremely costly and is one of the biggest financial commitments that you will ever have to go through in your whole life.
When buying a new house, you may be required to apply for a home loan or a mortgage to help you pay for this property. A Total Debt Servicing Ratio is a great tool that can help you when applying for a mortgage or a loan.
If you are unsure as to what a total debt servicing ratio is, then here is a guide to everything you need to know about a debt servicing ratio.
- How to get a good morgage deal for your house >>
- How to save money when buying on older property >>
- What type of property insurance do you need ? >>
What is a total debt servicing ratio?
First thing you should be aware of is what exactly a debt service ratio is. A Total Debt Servicing Ratio is a tool that can be used to help you finance for your loan or mortgage for your new property. It is a tool that is used by financial lenders and mortgage brokers that will allow you to determine what proportion of your gross income you can put towards this loan.
It also allows you to see how much of your gross income has already been spent on house related finances and other similar payments. Total debt servicing ratios are extremely helpful to both the buyer and the lender.
How does a total debt servicing ratio work?
Like previously mentioned, a total debt servicing ratio is used by either a financial lender or a mortgage broker in order to determine how much you will need to borrow in order to pay for your new property. The price of the loan you will need for your new house is calculated by these lenders in a few simple steps.
When using a total debt servicing ratio lenders and brokers will consider a number of different factors, including your property taxes, credit card balances, your monthly earnings, and your outgoing expenses. In doing this it allows the lenders to see what percentage of your income will be spent on the mortgage payments.
When you get a mortgage or loan for a new property you are typically required to make monthly repayments of a certain price. This price is determined by your lender or broker, which is why the use total debt servicing ratio to look at your expenses.
What are the steps involved in a total debt servicing ratio?
Home loan lenders and mortgage brokers will follow a previously set out formula and serious of questions that will provide them with an accurate figure on which they can base the price of your loan.
Firstly, they will ask who you are purchasing the property for, and who you will be purchasing it with. If you are purchasing the property with your partner, you will both be required to complete a total debt servicing ratio.
The lenders or brokers will then ask you to provide them with your monthly fixed income as well as your monthly variable income. This includes any bonuses, commissions, and any rental income that you may acquire. They will then ask you how much money you have already set aside for your home, as well as details on any other monthly commitments that you have.
You will then be asked to provide details on any other properties or loans that you may have. The lenders and brokers will take all of this information together in order to calculate a figure determining how much of your gross income you can afford to put towards a mortgage.
Why is a total debt servicing ratio important?
Like previously mentioned, a total debt servicing ratio is a vital step that is involved when applying for a mortgage or loan for your new property.
But there are a number of other reasons why they are important, which can benefit both you and your property down the line. A total debt servicing ratio can detect the level of your financial health. If the ratio shows that you have low financial health, it can often lead to a serious of over problems.
Not only will you not be eligible for a loan or mortgage, but it can also indicate the probability of default or bankruptcy. Checking your financial health with a total debt servicing ratio will allow you get all of your finances in order. This will prevent you from experiencing issues or problems later in life.
Hopefully from this guide you will now be aware of what a total debt servicing ratio is and the steps that involved within it.
You will also hopefully be aware of the importance of this ratio when applying for a mortgage or loan. Therefore, you will prioritise getting a total debt servicing ratio done prior to buying your new property.
Stay in touch
Hope this post inspires you and of course, I’d love to know what you think! Let me know in the comments below or find me on Instagram, Facebook or Twitter and add the hashtag #practicalfrugality so that I can see your post.
Or why not subscribe to my weekly newsletter with frugal living tips and recipes straight to your mailbox.