How the numbers work: loans and debt

Understanding DSR Formula

1. DSR = Net Operating Income (NOI) ÷ Annual Debt Service
2. Where:
3. NOI = Gross Rent - Operating Expenses
4. Annual Debt Service = All debt payments (mortgage, principal + interest)

Net Operating Income (NOI) Calculation

1. Gross rental income (weekly rent × 52)
2. Plus: parking fees, pet fees
3. Less: vacancy allowance (2-4 weeks typical)
4. = Effective Gross Income

Annual Debt Service Calculation

1. Mortgage principal repayments
2. Plus: mortgage interest payments
3. Plus: any other property-secured debt
4. = Total Annual Debt Service

Rental Yield and DSR Relationship

1. Gross Rental Yield = Annual Rent ÷ Property Value × 100
2. Example: $650/week rent on $600K property
3. Annual rent: $650 × 52 = $33,800
4. Yield: $33,800 ÷ $600,000 × 100 = 5.63%

Example 1: Auckland Apartment - Negative Cashflow

1. Weekly rent: $580
2. Annual gross rent: $580 × 52 = $30,160
3. Less vacancy (3 weeks): -$1,740
4. Effective gross income: $28,420

Example 1: Auckland Apartment - Negative Cashflow

1. Rates: $2,800/year
2. Insurance: $1,200/year
3. Body corporate: $4,500/year
4. Property management (8%): $2,413/year
5. Maintenance (0.5% for apartment): $3,250/year
6. Total operating expenses: $14,163

Example 1: Auckland Apartment - Negative Cashflow

1. Effective gross income: $28,420
2. Less operating expenses: -$14,163

Net Operating Income (NOI): $14,257

Example 1: Auckland Apartment - Negative Cashflow

1. Monthly payment: $3,287
2. Annual debt service: $39,444

Example 1: Auckland Apartment - Negative Cashflow

1. DSR = $14,257 ÷ $39,444

DSR = 0.36

Example 2: Wellington House - Breakeven

1. Weekly rent: $750
2. Annual gross rent: $39,000
3. Less vacancy (2 weeks): -$1,500
4. Effective gross income: $37,500
5. Operating expenses:
6. Rates: $3,500, Insurance: $1,800, PM: $3,120
7. Maintenance (1%): $7,500
8. Total expenses: $15,920
9. NOI: $37,500 - $15,920 = $21,580

Example 2: Wellington House - Breakeven

1. Annual debt service: $33,174

Example 2: Wellington House - Breakeven

1. DSR = $21,580 ÷ $33,174

DSR = 0.65

Example 3: Christchurch House - Positive Cashflow

1. Weekly rent: $600
2. Annual gross: $31,200
3. Less vacancy (2 weeks): -$1,200
4. Effective gross: $30,000
5. Operating expenses:
6. Rates: $2,800, Insurance: $1,500, PM: $2,496
7. Maintenance: $5,500
8. Total: $12,296
9. NOI: $30,000 - $12,296 = $17,704

Example 3: Christchurch House - Positive Cashflow

1. Annual debt service: $24,325

Example 3: Christchurch House - Positive Cashflow

1. DSR = $17,704 ÷ $24,325

DSR = 0.73

Example 3: Christchurch House - Positive Cashflow

1. Annual debt service: $20,851
2. DSR = $17,704 ÷ $20,851 = 0.85
3. Still negative!

Example 4: Regional Property - Strong DSR

1. Weekly rent: $550
2. Annual gross: $28,600
3. Less vacancy: -$1,100
4. Effective gross: $27,500
5. Expenses: $9,500 total
6. NOI: $18,000

Example 4: Regional Property - Strong DSR

1. Annual debt service: $18,009

Example 4: Regional Property - Strong DSR

1. DSR = $18,000 ÷ $18,009

DSR = 0.9995 (essentially 1.0)

Example 4: Regional Property - Strong DSR

1. Annual debt service: $16,808
2. DSR = $18,000 ÷ $16,808

DSR = 1.07

Example 4: Regional Property - Strong DSR

1. Annual debt service: $15,607
2. DSR = $18,000 ÷ $15,607

DSR = 1.15

Example 5: Interest-Only vs Principal & Interest Impact

1. Annual debt service: $36,288
2. DSR = $24,000 ÷ $36,288 = 0.66
3. Negative cashflow: $12,288/year

Example 5: Interest-Only vs Principal & Interest Impact

1. Annual debt service: $31,200 (interest only)
2. DSR = $24,000 ÷ $31,200 = 0.77
3. Negative cashflow: $7,200/year

🌍 Real-World DSR Investment Stories

1. Gross rent: $31,200
2. Body corp: $5,200/year
3. Rates/insurance: $4,200/year
4. PM & maintenance: $4,100/year
5. NOI: $17,700
6. Debt service (6.5%): $43,507
7. DSR: 0.41

Top-up needed: $25,807/year ($496/week!)

Who this happens to, and what it meant for them

🌍 Real-World DSR Investment Stories

1. Gross rent: $30,160
2. Operating expenses: $9,800
3. NOI: $20,360
4. Debt service: $18,586
5. DSR: 1.10

Positive cashflow: $1,774/year

Who this happens to, and what it meant for them

1. $650K property, $520K loan (80%)
2. Rent: $600/week
3. NOI: $19,500
4. Debt service at 2.5%: $24,715
5. DSR: 0.79 (negative, but manageable)
6. Top-up: $5,215/year ($100/week)

Who this happens to, and what it meant for them

1. Same property, same rent
2. NOI: $19,500 (unchanged)
3. Debt service at 6.5%: $39,291
4. DSR: 0.50

Top-up: $19,791/year ($380/week!)

🔢 Worked Examples

1. Monthly repayment: $667.33
2. Total of payments: $667.33 x 60 = $40,040
3. Lump sum at the end: $0

Total interest paid: $40,040 - $30,000 = $10,040

Who this happens to, and what it meant for them

🔢 Worked Examples

1. Monthly repayment: $557.13
2. Total of payments: $557.13 x 60 = $33,428
3. Plus balloon at the end: $9,000
4. Total paid: $33,428 + $9,000 = $42,428

Total interest paid: $42,428 - $30,000 = $12,428

🔢 Worked Examples

1. Standard monthly (no balloon): $1,145.03
2. Balloon monthly: $790.00

Lower by $355.03 a month, but $15,050 is owed at the end

Who this happens to, and what it meant for them

🔢 Worked Examples

1. If it is a genuine GFV deal, Priya can hand the car back for $15,050
2. If the car is only worth $13,000 and it is a plain balloon:
3. Negative equity: $15,050 - $13,000 = $2,050

She must cover that $2,050 gap to sell or trade the car

1. New monthly repayment: $303.25
2. Total of new payments: $303.25 x 36 = $10,917

Extra interest on the balloon alone: $10,917 - $9,000 = $1,917

Who this happens to, and what it meant for them

1. Balloon loan instalments: $33,428
2. Refinance of the balloon: $10,917
3. Total paid: $33,428 + $10,917 = $44,345

That is about $4,305 more than the $40,040 standard loan, and it took 8 years, not 5

1. Monthly repayment: $444.38
2. Total of payments: $444.38 x 60 = $26,663

Total interest: $26,663 - $20,000 = $6,663

Who this happens to, and what it meant for them

1. Monthly repayment: $358.56
2. Total of payments: $358.56 x 60 = $21,513
3. Plus balloon: $7,000
4. Total paid: $21,513 + $7,000 = $28,513

Total interest: $28,513 - $20,000 = $8,513

🔢 Worked NZ Examples

1. Amount borrowed: $20,000 over 60 months at 12% a year
2. Monthly repayment: about $444.89
3. Total repaid: $444.89 x 60 = $26,693.40

Total interest: $26,693.40 - $20,000 = $6,693.40

Who this happens to, and what it meant for them

🔢 Worked NZ Examples

1. Amount borrowed: $20,000 over 60 months at 9% a year
2. Monthly repayment: about $415.17
3. Total repaid: $415.17 x 60 = $24,910.20

Total interest: $24,910.20 - $20,000 = $4,910.20

🔢 Worked NZ Examples

1. Monthly repayment: about $444.89
2. Nothing owing at the end

Total interest: $6,693.40

Who this happens to, and what it meant for them

🔢 Worked NZ Examples

1. Monthly repayment: about $371.42 (about $73 a month lower)
2. Payments over 60 months: $371.42 x 60 = $22,285.20
3. Plus the balloon due at the end: $6,000
4. Total repaid: $22,285.20 + $6,000 = $28,285.20

Total interest: $28,285.20 - $20,000 = $8,285.20

1. Loan without add-ons: $20,000, about $444.89 a month, $26,693.40 total
2. Loan with $2,500 of add-ons: $22,500, about $500.50 a month
3. Total repaid on the bigger loan: $500.50 x 60 = $30,030.00
4. Extra paid because of the add-ons: $30,030.00 - $26,693.40 = $3,336.60

Of that, $2,500 is the add-on price and $836.60 is interest on it

Who this happens to, and what it meant for them

1. Monthly repayment: about $477.45
2. Total repaid: $477.45 x 60 = $28,647.00

Total interest: $5,647.00

Who this happens to, and what it meant for them

1. Monthly repayment: about $352.89
2. Total repaid: $352.89 x 60 = $21,173.40

Total interest: $4,173.40

The term trap: same rate, double the interest

1. Option A: $10,000 at 15% over 3 years
2. Monthly payment: about $347
3. Total repaid: about $12,480
4. Total interest: about $2,480
5. Option B: $10,000 at 15% over 6 years
6. Monthly payment: about $211
7. Total repaid: about $15,225
8. Total interest: about $5,225

Same rate, but the 6 year term costs about $2,745 more in interest, more than double, for a payment that is only about $136 lower a month

🔢 Real-World Examples

1. Keep the current loan: $15,000 at 18% over 3 years
2. Monthly payment: about $542
3. Total interest: about $4,522
4. Consolidate: $15,000 at 12% over 5 years
5. Monthly payment: about $334
6. Total interest: about $5,020
7. Plus $250 establishment fee

The lower rate but longer term costs about $748 more overall, even though the payment drops by about $208 a month

Who this happens to, and what it meant for them

🔢 Real-World Examples

1. Cards: $12,000 at 20% over 3 years
2. Monthly payment: about $446
3. Total interest: about $4,055
4. Consolidated: $12,000 at 13% over 3 years
5. Monthly payment: about $404
6. Total interest: about $2,558

Lower rate, same term: Sione saves about $1,500 in interest and closes the cards so the debt cannot rebuild

Who this happens to, and what it meant for them

1. Clear it over 3 years at 20% (on the cards)
2. Total interest: about $6,760
3. Add to the mortgage at 6.5% over 25 years
4. Total interest if left the full term: about $20,500

The much lower rate costs about three times as much interest, because it is spread over 25 years, and the debt is now secured against her home

Who this happens to, and what it meant for them

1. Red flag: a rate near the high-cost range and a big upfront fee
2. Red flag: the payment is unaffordable, so a responsible lender should not write it
3. Step 1: he calls MoneyTalks free on 0800 345 123
4. Step 2: a mentor reviews his budget and contacts his lenders

Because he has no assets and owes between $1,000 and $50,000, a No Asset Procedure is explored instead of an unaffordable loan

Who this happens to, and what it meant for them

The residential care subsidy rules

1. In the 5 years before you apply: up to $8,500 of gifting a year is disregarded, a total of $42,500 across the five years.
2. Longer than 5 years before you apply: up to $27,000 a year is disregarded.
3. Gifts in recognition of care are capped at $42,500 when combined with other allowable gifting in the last 5 years.

Anything above the allowance is counted back in as though you still had it.

The residential care subsidy rules

1. A parent gifts $50,000.00 towards a child's house deposit.
2. Three years later they apply for the residential care subsidy, so the gift falls within the 5 year window.
3. Allowable that year: $8,500.00 .

Counted back into their assets: $50,000.00 − $8,500.00 = $41,500.00 , money they no longer have but are assessed as holding.

How the six year clock works

1. Start point 1: when the debt became owing. For most consumer debt this is when you defaulted, rather than when you first borrowed.
2. Start point 2: your last payment. Any payment towards the debt, of any size, resets the clock to that date.
3. Start point 3: your last acknowledgement. Acknowledging the debt, in writing, resets the clock in the same way.

Six years runs from whichever of these happened most recently.