What is a debt-to-income ratio?

A debt-to-income ratio (DTI) balances your debts (e.g. personal loans, student loans, and credit card balances) against your income (e.g. your employment income and dividends from shares).

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, but also a way to make sure the bank receives the money they've lent to you back, including interest. 

The debt-to-income ratio is also known as a loan-to-income ratio (LTI) and is an important factor to consider during the home loan application process. 

You'll often see DTI ratios expressed as a two-digit decimal. For example, 4.9.

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!

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
• Dividends from share trading
• If self-employed, net profit before tax
  

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

• Credit cards
• Personal loans
• HECS/HELP loans
• Portfolio loans
• Any existing mortgages
• Tax debts
• Buy Now Pay Later (BNPL) loans

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 makes $60,000 per year from working. 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 5.2.

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.

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 applying 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

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 (requires manual approval from their credit department)
• 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.