Can you Afford that Condo? Introducing the Debt Ratios
 

Banks use the Debt Service Ratio to assess your creditworthiness.

Defined as the monthly loan installment amount divided by your gross monthly income, your DSR typically has to be somewhere in the 35% to 40% region for banks to be happy to grant you that mortgage. (See also past article on second home loan.)

However, the DSR ratio doesn't say if you're taking up excessive loans.

You may have a low overall DSR, but due to low interest rates and long mortgage tenors, you may be piling up too much loans. Or maybe your income has just gone up (how nice) , but with savings still remaining low, your DSR may look deceptively good.

It is even possible to have negative net worth with good-looking DSR. Banks don't care, but I hope you do.

To be safer, you should also look at your Debt to Net Worth ratio.

This is similar to the Debt Equity Ratio used by financial analysts to assess companies. Small companies with 60% D/E are deemed to be ok.

I would keep my Debt to Net Worth ratio at 50% or lower.

Calculating your Debt to Net Worth ratio is straightforward: Total up your outstanding loans, and divide the sum by your net worth (see how to calculate your net worth).

For example, if your outstanding loans sum up to $500k and your net worth is $1 million, your Debt to Net Worth ratio would be 50%.

What is your Debt to Net Worth ratio?


http://www.salary.sg/2009/can-you-af...e-debt-ratios/

Is it even possible for working class people like me? 50% leh... if I were to take a housing loan for $400k, then maybe buy a car take another $80k loan. In order for my debt/net worth ratio to be 50% I need to have one mil???

Quite hard, but can be done. Don't forget your flat and car have some value, and that you and your wife will share the burden.

Assume you own nothing but a flat. If it's worth $300k in the market and you still owe bank $100k, then you'll achieve that ratio of 50%.

But for your situation, assuming your flat is worth $500k and your car's scrap value is $70k, then your wife and you will need $870k in OTHER assets to achieve that 50% ratio.

If the car doesn't come into the picture, it's just $700k you need in other assets. :)

If, further, you owe only 300k on the flat, it's just $400k. :)

Maybe when I am 45... During the initial phase the debt sure exceed my net worth many times over... :(