Has calculating DSL (Debt Service Level) for banks changed

[nubiwan]

My understanding of DSL calculations is as follows. Think it was derived from Peter Kinch's book. Do banks still use this formula for loan approval, or has it changed/



House 1 Mortgage $750 rent $1200

House 2 Mortgage $750 rent $1500

House 3 Mortgage $1200 rent $1800

House 4 Mortgage $1200 rent $1700



Total Income $6200

Total Debt $3900



70% TMRI Total Income x 0.7 or $6200 x 0.7= $440

Investment income $440 x 12 = $5280



Personal Salary $50,000

Investment Income $5280



Total income $55,280 x 40% used in Annual DSL calculations = $22,112 or $1842 per month



If my consumer debt (car payment, credit cards) = $650 per month



MY DSL is $1842-$650=$1192



In other words, I have $1192 available for new loans etc.



This still the way it is calculated?

 

[RobMacdonald]

That formula now only works for one bank. Every bank has pretty drastically changed their calculations. National Bank uses 50% of rental income, used to be a DCR calculation. TD went from a 1.1 DCR to a 1.2 DCR.



It used to be a lot easier to work this out yourself. When you have only a few properties, its still pretty straight forward, but once you get over 4 properties, it's pretty challenging.

 

[Thomas Beyer]

[quote user=RobMacdonald] National Bank uses 50% of rental income, used to be a DCR calculation. TD went from a 1.1 DCR to a 1.2 DCR.
That sounds like an apartment building, so no better or wrose really. i.e. take gross income, deduct all expenses to operate an asset, arrive at an NOI, divide over 1.2 DCR and get max loan amount !



One can then argue that 50% is too much or too little, and that in some instances actual expenses might be only 45 or 42% of rent collected.

 

[nubiwan]

Thanks Rob,



So in my example above, I'd be looking at



Personal salary $50K

Investment income $6200 *12 *50% = $37,200 annually

OR $87,200



Just doesn't seem right to me. Actually seems quite high to me. Or should it be 50% of Rental Income after mortgage debt service.



Any idea what Scotia bank uses? The last time I was in there, I think it was 50% of rental income.



Finally, what is DCR? Never some across that term before.



Thanks

Nubiwan

 

[nubiwan]

OK quickly found that DCR is just ratio of income over debt. But how does each bank / lender calculate the debt. Do they include such things as Property Taxes, insurance, utilities, etc?



In the case of acquiring single family homes to rent, then as long as my DCR is kept above 1.2, then can I just keep buying them?



I am pretty sure the answer is no, so how do I know when I have reached my limit. How does each lender draw the line?



The reason I ask all these questions is that I have a pretty decent equity and cashflow built up in all my properties. MY DSL (as calculate above) is always pretty decent. Still, I am pretty sure I am going to soon reach my banks sweet point.



How much does "other" personal income come into play, when you are building up $1-2 million in property, along with the associated debt.



Thanks



N

 

[Thomas Beyer]

[quote user=nubiwan]DCR is just ratio of income over debt.
DCR is NET income over debt.



NET income includes all those expenses you mention.