What is a debt-to-income (DTI) ratio?
When you apply for a home loan, lenders use all sorts of measurements to understand if you’re a good fit for their product. One measurement involves calculating your debt-to-income (DTI) ratio.
A debt-to-income ratio measures the total amount of household debt you have compared to your total income. For instance, if you have a DTI ratio of 4, this means you have four times as much debt as you earn.
DTI ratios are partly a mark of responsible lending practices, enforced by the Australian Prudential Regulation Authority (APRA). But, lenders also use debt-to-income ratios to ensure you can pay for your home loan before they approve your application.
So, knowing your debt-to-income ratio is important when applying for a home loan because a bad DTI ratio can result in your application being denied.
How to calculate debt-to-income ratios
To calculate your debt-to-income ratio, you first need to add all of your debts and liabilities together, including:
- Credit card limits
- Personal loan debts
- HECS/HELP loan
- Portfolio loans
- Any mortgages you have
- Tax debts
- Buy Now Pay Later (BNPL) debt.
Then, you need to find your total income for the year, which 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.
After you have found your total debt and your total pre-tax income, divide your debt by your income. The figure you are left with is your DTI ratio.
Debt-to-income ratio formula
Total debt ÷ total income = Debt-to-income ratio
Debt-to-income ratio calculation example
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 times, which could place Ash in the “good, but not great” category in the opinion of a lender.
What is a good debt-to-income ratio?
Generally, the lower your debt-to-income ratio is, the better. This is because DTI ratios describe how many times larger your debt is as compared to your income.
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 times 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 ratio: 3.0 or below, considered excellent
- Medium DTI ratio: 4.0 – 6.0, considered good, but not excellent
- High DTI ratio: 7 – 9.0 or higher, considered risky
Do banks have debt-to-income ratio limits?
Lenders often have maximum debt-to-income ratios. If you exceed their DTI limits, then they may not approve your home loan.
While these aren’t necessarily set in stone (lenders consider all sorts of personal circumstances when assessing loan approval) you could use them as a guide when considering a lender based on your circumstances.
What is ANZ's maximum debt-to-income ratio?
ANZ's maximum DTI ratio is 7.5 times.
What is Commonwealth Bank's maximum debt-to-income ratio?
Commonwealth Bank doesn’t have an explicit DTI ratio cap. However, anything over 7.0 times requires manual approval from their credit department.
What is NAB's maximum debt-to-income ratio?
NAB's maximum DTI ratio for lending is 8.0 times.
What is Westpac's maximum debt-to-income ratio?
Westpac's maximum DTI ratio is 7.0 times.
How can I lower my debt-to-income ratio quickly?
If you want to improve your chances of a successful home loan application, then lowering your debt-to-income ratio is a good place to start.
Lowering your DTI ratio involves lowering as much of your debt as possible and increasing your income as much as possible.
To lower the amount of debt you have, consider:
- A debt consolidation loan
- Paying off your credit card debt
- Lowering your credit card limits
- Putting extra money towards repaying your car loan or personal loan sooner
- Clearing your Buy Now Pay Later (BNPL) debt
- Paying off your student debt.
To increase your income, consider:
- Asking for a pay rise at work
- Taking on a side hustle or gig-work
- Applying for a higher paying job.
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 to see what rates and offers are currently available in the Mozo database.
FAQs
How do credit cards affect my debt-to-income ratio?
Credit cards are seen as a liability that you will have to pay for and lenders may therefore view your credit card limit as part of your total debt, even if you haven’t spent anything on it.
This means that if you have a credit card with a $5,000 limit on it, that $5k will get added to your total debt amount when calculating your DTI ratio.
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