What is a debt-to-income ratio?

One large ball and one small ball are balanced on a seesaw, representing the balance of debt to your income.

Your debt-to-income ratio (DTI), also known as a loan to income ratio (LTI), is an important factor to consider during the home loan application process. It is essentially the balance struck between your debts and your income, commonly expressed as a two-digit decimal.  

Lenders will look at your DTI ratio as a way to determine your serviceability, that is, your ability to make mortgage repayments without falling into a tough financial position. It’s partly a mark of APRA-mandated responsible lending, partly to make sure the bank gets the money they’ve lent back without too much hassle.

How to calculate your debt-to-income ratio (DTI)

To calculate your debt-to-income ratio for a home loan, you’ll need to take the total amount of debts and liabilities you have (including your home loan amount), then divide that number by your pre-tax (or, gross) income. The number your calculator spits out is your DTI – easy!

What income and debts are used to calculate your DTI?

The sorts of income used to calculate your debt-to-income ratio can include:

  • Your gross income (pre-tax)
  • Overtime pay and bonuses
  • Casual/contract work income
  • Commission
  • Rental income from investment properties
  • If self-employed, net profit before tax

The debts which will factor into your debt-to-income ratio can include:

Let’s look at an example of how to calculate a debt-to-income ratio:

Ash is applying for a $300,000 home loan and has a gross income of $60,000 per annum. They currently have a car loan worth $10,000 and a credit card with a limit of $2,000. 

If Ash adds up all their debts (home loan, credit card, and car loan), they end up with $312,000. Divide that number by their income of $60,000, and we find their debt-to-income ratio is 5.20.

A DTI ratio of 5.2 will generally place Ash in the “good, but not great” category in a lender’s eyes. This means that the amount Ash can borrow might be more than someone with a bad (high) DTI.

What is a good DTI ratio?

The higher your debt-to-income ratio, the less likely you’ll be able to secure the loan you want. With a “high” DTI of 9 or above, your likelihood drops to near-zero. So it’s best to tackle any other debts or loans you’ve got first, before going for a home loan.

If you don’t have any other debts, then you’ll need to increase your income to balance out that ratio, or have a look at some other things you can do if the bank won’t lend you as much as you want.

As a general rule, low, medium, and high debt-to-income ratios look something like this:  

  • Low DTI: 3.0 or below, considered excellent
  • Medium DTI: 4.0 – 6.0, considered good, but not excellent
  • High DTI: 7 – 9.0 or higher, considered risky

Do banks have official debt-to-income (DTI) limits?

Lenders often have maximum debt-to-income ratios that, if exceeded, they generally won’t approve a home loan for. While these aren’t necessarily set-in-stone, you could use them as a guide when considering a lender based on your circumstances. 

Here are some examples of maximum DTIs from the big four banks in Australia:

  • ANZ max. DTI: 7.5
  • Commbank max. DTI: 7.0
  • NAB max. DTI: 8.0
  • Westpac max. DTI: 7.0, however they may refer an application with this DTI or higher to their credit department for further review.

However, these DTI ratio limits aren’t exclusive to the big players. Other lenders are joining the ranks of banks toeing the seven-or-under DTI line. 

If you want to read more about home loans, then have a look at some of our other guides and articles. Or compare home loans now, to see what rates and offers are currently available in the Mozo database.

Home loan comparisons on Mozo - last updated 13 August 2022

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