Latest video explaining Mortgage Calculator, Debt To Income Ratio and Borrowing Calculators.
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Michael Anastasiadis – Mortgage Broker Wellington | Mortgage Broker Michael Anastasiadis
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FULL Transcription of the video here folks:
Good morning, everybody. It’s Michael Anastasiadis at Bozinoff Mortgages, mortgage advisor, mortgages made easy, coming to you live here from a bit of an overcast day here in Newlands.
Look, I just wanted to jump online quickly and just give a little video update on mortgage calculators and debt to income ratios that was announced yesterday that the Reserve Bank of New Zealand is going to go out for consultation on, as they add another tool in their toolkit to try and slow down the housing market.
So what does debt to income ratio means?
So debt to income ratio means the banks look at your income, and basically they put a ratio on that, say four, five, six times that amount, and that’s the amount you can borrow.
So if your income’s say a hundred thousand dollars a year, let’s keep it simple. They have a five time ratio. So a debt to income ratio of five, which means you can’t borrow more than 500,000. So if 100,000 is your gross taxable income, so gross income from all sources, that’s how much you can borrow.
This is something that the Reserve Bank has been wanting to have in their toolkit for a long, long time. Now, the banks know about this and they’ve been quite prudent, I would say, over a number of years where they do have their own calculations, debt to income calculations.
Each bank is different and they don’t actually share their exact inner workings, but basically the banks have been policing this themselves quite nicely, because like all businesses, they don’t want more compliance.
Because more compliance mean more costs and more people taking away what they’re there to do to report back to government via the Reserve Bank.
So over the years of me being a mortgage broker, I’ve actually found out that once you start borrowing more than five times your income, regardless, you start to go on shaky ground. And you go on ground that, personally, I’m uncomfortable with as well, and I do call that out to my clients.
Now, sometimes depending on the profession, so dentists, doctors, lawyers, pre COVID pilots, sometimes you could borrow a little bit more than five or six times the amount of income, because they’re on a trajectory of having their income going quite high.
But in general, it’s about five times your income that most banks are comfortable with. So look, this brings me onto mortgage calculators. A lot of people go on to a mortgage calculator to if they can afford the loan. Now, a mortgage calculator, and I use the sorted.org.nz calculator.
I think if you gone to tools, they’ve got a very good mortgage calculator, because you can put in the loan amount or the mortgage amount, the loan term, the interest rate, and then you just click weekly, fortnightly or monthly, and it works out the repayments for you.
Now, a lot of people go online and look at those calculators and they think, “Oh yeah, a $600,000 loan over 30 years, what’s the advertised interest rate at the moment? 2.19%?
Look, those repayments a week are cheaper than my rent. Of course I can afford those.” But there’s a difference between a mortgage calculator that tells you what your repayments are going to be on the mortgage, which is rather useful once you’re pre-approved or once you’ve got your property sorted, so you know what the actual loan is, as opposed to a borrowing calculator, where that actually calculates your serviceability or your ability to borrow. The borrowing capacity.
In the mortgage world, that’s called serviceability. Hi to everyone watching, by the way, do me a favor. If you’re finding this video useful, press that like button, press that share button, because the more people that can see content like this, the best it is for all of us.
So a borrowing calculator. So with a burrowing calculator, you would put in something like your income, and then you would list your expenses.
Usually a borrowing calculator will ask you for your assets. For example, how many motor vehicles do you have? Because depending on the number of motor vehicles you have, that calculates the algorithms in the background because that factors in costs. Things like that. It also asks you, “Do you have a student loan?”
Now, although the banks don’t look at student loans as a debt, like a short term bad debt, like they would overdrawn credit cards or personal loans or things like that, depending on the size of your student loan and the amount that you’re repaying per week or month, that’s going to impact how much you can borrow.
Because if you’re paying $200 a week on your student loan, that’s $200 less you have to be able to service a loan.
So they look at the expenses. How many children do you have? Do they go to private schools? Do they go to public schools? What’s the limits on your credit cards? Do you have credit cards? What’s the credit limit on those? Because that shows the bank that there’s a line of credit there.
Now, you may have a zero balance, but if your limit’s 25,000, because you want to show off, you’ve got a platinum gold card. That’s not going to help it, because the bank’s going to load in that you’ve already got $25,000 available.
So it’s those little things that a mortgage calculator doesn’t show, but a borrowing calculator does.
Unfortunately, you just can’t go on Google and find a borrowing calculator. You actually have to engage with a professional like myself, or other mortgage advisors to do those calculations for you, because it’s dependent on everyone’s circumstances. So I just wanted to jump online and just share this video, because sometimes people think, “Oh, look at that.”
For me, it’s like click bait. They think, “Oh, look at that. My weekly mortgage repayments are going to be cheaper than my rent. The bank will give me a loan.” And I have to explain to people that the mortgage calculator is there to work out how much the mortgage is going to actually cost you per week, fortnight or month, not how much you can actually borrow.
So there you are guys, hopefully this useful video, thank you to everyone again for watching. If you’ve got any other questions, feel free to put them in the comments below and I will try and get to them, but look, always happy to have a chat with anyone. But honestly, the rule of thumb is your income times five. That is a really good starting point to know what you can borrow. So I know it’s hard for a lot of people out there because prices are so high.
I do understand that, but those factors, those ratios, are there for a purpose. And I’ve also got to say, to be fair to the banks, that when they do their mortgage calculations for a new application, they don’t enter an interest rate of 2.19, like a mortgage calculator would. The banks are entering like a five, six or 7% interest rate.
So they are stress testing the mortgage already for interest rates potentially going up. Now, that’s not a sign that interest rates are going to go up, so don’t start quoting that you’ve seen it on a video, that the banks have changed their calculators. They do that anyway, because I think that the average interest rate over a 30 year loan in New Zealand is actually 7%, so people have to factor that in. So it’s not just the 2.19.
So by the time you enter your income, add in all your expenses then add in a interest rate servicing test rate of six, 7%, you can quickly see how the amount you have available gets diminished for a loan.
Thanks again, guys, for watching, press that like button, press that share button, and I’ll come back with another video. I think I’ve got a few open homes this weekend, so I’ll be live to you from those. Righto guys. Have a great afternoon and may God keep blessing our beautiful country. Cheers guys.