Navigating the ever-changing landscape of loan policies can be confusing. Terms like LTV, DTI, and DSR frequently appear when discussing loan eligibility. Understanding these three key financial ratios can help you better predict how much you can borrow.
LTV (Loan-to-Value Ratio)
When purchasing a home, many people opt for a mortgage. In this case, you're borrowing money from a financial institution, using your future home as collateral. The LTV (Loan-to-Value Ratio) refers to the amount you can borrow compared to the value of the home. For example, if you buy a $500,000 house and borrow $400,000 against it, your LTV would be 80%.
DTI (Debt-to-Income Ratio)
DTI is a metric that assesses your ability to repay debts relative to your income. To calculate it, divide the sum of the principal and interest of your annual mortgage payments by your annual income, then multiply by 100. Generally, a lower DTI suggests a greater ability to repay debts.
DSR (Debt Service Ratio)
DSR is a broader metric that establishes a borrowing limit based on all your existing debts, not just mortgage debt. This includes student loans, overdrafts, auto loans, and credit card debts. The combined principal of all these loans is compared to your annual income to set a specific percentage limit for additional borrowing.
Are DTI and DSR the Same?
No, they're different! DTI focuses only on mortgage-related debts, while DSR accounts for virtually all kinds of debt to determine your overall borrowing limit, making it a more stringent regulation.
Importance of DSR for Personal Loans
If your total loans exceed $100,000, you can only borrow up to 40% of your annual income under DSR. You can't get a loan if the sum of the principal and interest you'll pay over a year exceeds 40% (50% for non-bank loans) of your annual income, excluding specific loan types like rent deposits or small personal loans. This is particularly impactful for young people with lower incomes.
To increase your borrowing limit, you can either boost your income or reduce your annual principal payments. Newly introduced 10-year term personal loans can temporarily relieve the burden of annual payments, thereby increasing your borrowing limit.
Three Factors for Mortgage Loans
Real estate markets are classified into speculative zones, adjustment areas, and non-regulated zones.
- For non-homeowners, a 50% LTV is applied regardless of location or price, effective from 2023. This applies to those selling their old homes to move into new ones as well.
- Multi-home owners can now get a mortgage with an LTV of 30%.
- DTI percentages differ by location:
- Speculative areas are capped at 40% (e.g., specific districts in Seoul)
- Adjustment areas have a 50% cap
- Other areas have a 60% cap
- DSR is still relevant: even if LTV and DTI regulations are relaxed, a DSR of 40% still applies if you borrow more than $100,000.
By understanding these three crucial metrics—LTV, DTI, and DSR—you can better navigate the complex world of loans and make more informed decisions.