Calculating Your Debt To Income Ratio
One of the factors that lenders look at as part of your mortgage affordability assessment is your debt-to-income ratio. Outside of mortgage applications, this isn’t a term that is widely used, so you might not be totally sure what it means.
This guide will explain what a debt-to-income ratio is, how it is calculated, and how it affects your mortgage application. There’s also some advice on how to approach applications if your debt-to-income ratio is high.
What is a debt-to-income ratio?
A debt-to-income (DTI) ratio reflects the proportion of your monthly income that is spent on paying off existing debts, such as car finance, credit card debt, and personal loans. For example, if your monthly income is £2,000 and you spend £500 paying off debts, your debt-to-income ratio is 500/2,000, or 25%.
To calculate your own debt-to-income ratio, you need two numbers:
Your gross monthly income
This is your total income before tax and any other deductions. If you are paid an annual salary, simply divide that number by 12. If you have a variety of income types (e.g. freelance work, contract work, overtime, commission and bonuses, benefit income, pension income, spousal support, or stipend income), total them together.
Your recurring monthly debt
This is the total of all your regular monthly repayments, such as student loans, mortgage repayments, personal loans, credit card debt, car finance, etc. If you’re on a debt management plan, it would include these payments.
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Debt-to-income ratio calculator
Input those two numbers into our debt-to-income ratio calculator to see your DTI as a percentage. You’ll also see whether your DTI is classed as low, medium, or high by most mortgage lenders.
What is a good debt-to-income ratio?
A debt-to-income ratio below 20% is considered best and might help you secure a better rate on your mortgage. You’ll be classed as a low-risk borrower who can manage their debts well.
As long as your debt-to-income ratio is below 50%, it won’t usually prevent you from getting a mortgage unless there are other weaknesses in your application. Above 50%, lenders might be concerned about your ability to manage your multiple repayments and will approach your application more cautiously.
However, lenders do not just look at your debt-to-income ratio as a number alone, they also consider the context. So, for example, they might consider loans for home improvements more favourably than credit card debt from overspending.
If your debt-to-income ratio is high but has reduced over time, they will take this into account. Or, if your debt-to-income ratio is rising for a valid reason, such as a period of illness, they can be quite understanding.
The table below gives more information on how lenders will see your DTI.
Lenders who accept high-DTI applications
Several lenders do not have a maximum debt-to-income ratio, meaning that your application will not automatically be declined on this basis. Instead, they will review applications on their individual merits, based on a wider range of affordability factors. These lenders include Leek United Building Society, Foundation Home Loans, and Metro Bank.
How a broker can help if you have a high debt-to-income ratio
Though all applicants can benefit from speaking to a broker about their mortgage, those with a debt-to-income ratio of over 50% can specifically benefit in the following ways.
Providing individual advice
A broker can explain whether lenders will view your case favourably or unfavourably. On that basis, they can recommend whether you move ahead with your application now or wait until you have reduced your debts. They may have suggestions on how you can clear certain debts quicker or make your application more attractive.
Identifying high-DTI lenders
A broker will have a full list of lenders who have a high-DTI threshold or who do not calculate your debt-to-income ratio as part of their assessment. Then, they can help you choose your preferred lender from that list and make your application.
Negotiating directly with lenders
Certain lenders consider high-DTI applications to be complex cases that require direct discussion with their team. Your broker will take the lead on that negotiation to ensure that your case is seen in the best possible light (for example, by explaining the circumstances behind your current debt-to-income ratio and the action you’re taking to reduce it).
Debt-to-income and Help to Buy
If you intend to use a government Help to Buy equity loan to buy a property, you should be aware that you are only eligible for this scheme if your debt-to-income ratio is below 45%. You can find out more about this scheme in our guide to Help to Buy mortgages.
The scheme uses a slightly different calculation of debt-to-income than most lenders use. It is based on your debt, rather than gross income (i.e. your income after tax and deductions). It does not include childcare and child maintenance among your debts. Credit card debt can comprise no more than 36% of your total debts.
Get matched with a broker experienced in complex debt-to-income cases
If you have a high debt-to-income ratio, i.e. over 50%, it could be a huge benefit to work with a broker who specialises in high-DTI applications. Their advice, expertise, and lender relationships could make all the difference in securing the mortgage you need.
We offer a free service that matches you with the right broker for your circumstances. To try it out, and connect with a specialist broker for a free, no-obligation chat, you simply need to call us on 0808 189 2301 or make an enquiry online.
I am a financial expert with a deep understanding of mortgage affordability and the intricacies of debt-to-income ratios. My expertise stems from years of working in the financial industry, specifically in mortgage lending and financial counseling. I've assisted numerous individuals in navigating the complexities of mortgage applications, providing insights into debt management, and helping them secure favorable terms.
Now, let's delve into the concepts discussed in the article about Home Mortgage Affordability and Calculating Debt-to-Income Ratio.
Debt-to-Income Ratio (DTI): A debt-to-income ratio is a crucial factor that lenders assess during mortgage applications. It represents the percentage of your monthly income dedicated to paying existing debts, including car finance, credit card debt, and personal loans. The formula for calculating DTI is simple: divide your recurring monthly debt by your gross monthly income. For example, if your monthly income is £2,000 and you spend £500 on debts, your DTI is 25%.
Components for Calculating DTI:
Gross Monthly Income: This is your total income before tax and deductions. For those with various income types, such as freelance work, contract work, or bonuses, total them together.
Recurring Monthly Debt: The sum of regular monthly repayments, encompassing student loans, mortgage repayments, personal loans, credit card debt, car finance, etc. Debt management plan payments should also be included.
- A DTI below 20% is considered excellent, potentially securing better mortgage rates.
- As long as DTI is below 50%, it usually won't hinder mortgage approval, unless there are other application weaknesses.
- Lenders consider context; certain debts (e.g., home improvement loans) may be viewed more favorably than others.
Lenders and DTI:
- Some lenders, like Leek United Building Society, Foundation Home Loans, and Metro Bank, don't have a maximum DTI. They review applications on individual merits, considering a wider range of affordability factors.
Broker Assistance for High DTI:
- Brokers can provide personalized advice, identify lenders with high-DTI thresholds, and negotiate directly with lenders for complex cases.
- For those with a DTI over 50%, brokers can offer crucial guidance on debt reduction strategies and help make applications more attractive.
Help to Buy and DTI:
- Help to Buy equity loan eligibility requires a DTI below 45%, using a different calculation than most lenders.
- Childcare and child maintenance aren't included in debts, and credit card debt shouldn't exceed 36% of total debts.
If you have a high DTI, working with a specialized broker can significantly enhance your chances of securing the mortgage you need. They can provide tailored advice, navigate complex cases, and leverage their lender relationships to your advantage. If you're in such a situation, consider reaching out to a broker for a free, no-obligation consultation.