Understanding how to calculate your DTI can help you evaluate your financial readiness for a mortgage and identify areas to improve before applying for a loan. In Australia, many lenders have a benchmark DTI ratio of 6 or below, meaning your total debts should not exceed six times your annual income.
Your DTI ratio also plays a crucial role in determining the affordability of a home loan and your ability to meet monthly repayments. A high DTI indicates that a significant portion of your income is already committed to existing debts.
What Is Debt-To-Income Ratio?
Your debt-to-income ratio is your total debts and liabilities divided by your gross (before tax) income.
Debt-To-Income Ratio = Total Debt ÷ Gross Income
Knowing your debt-to-income ratio (DTI) is important when assessing your financial health and eligibility for a home loan. The DTI compares your total debt to your annual gross income and provides lenders with a snapshot of your financial obligations relative to your earnings.
Essentially, your DTI ratio considers your full debt exposure, ensuring you can meet your home loan repayments today and in the future. For example, let’s say you’re a couple, each earning a yearly gross income of $80,000 ($160,000 in total), you want to borrow $500,000, and your total liabilities are:
- $500,000 for the new mortgage
- A credit card with a monthly limit of $2,000
- Total debt: $502,000
The following formula would then be applied: $502,000 ÷ $160,000 = 3.14 DTI What this means is that your total debt is 3.14 times your combined income.
Lenders combine the DTI with other metrics like your credit score, living expenses, and the loan-to-value ratio (LVR) of your property.
Calculate Your DTI Ratio
Use our DTI calculator to determine your debt-to-income ratio.
What Income Is Used To Calculate Debt-To-Income Ratio?
Based on different income types, the following incomes are taken as income for DTI calculation:
- PAYG: The gross annual income before tax. It excludes compulsory super contributions.
- Self-employment: Net profit before tax, after acceptable add-backs.
- Other incomes such as casual, contract, rental, overtime, commission and bonus will be gross (unshaded) income before tax.
What Debts Are Included In The DTI Calculation?
- Credit cards
- Personal loans
- Portfolio loans
- Existing mortgages
- Tax debt
- AfterPay and other Buy Now Pay Later facilities
- Leases and hire purchases.
- HECS and HELP debt.
- Trade Support Loans.
- Company, partnership and trust liabilities.
- Other outgoing liabilities.
- Child support or alimony payments
- Medical debts
Additionally, where liabilities are shared with a non-applicant (joint loans), they will be included at 100% regardless of percentage ownership (some exceptions apply). While these liabilities are excluded from the DTI calculation, these will still need to be included in the home loan application as they are required for serviceability calculations.
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SIGN UP FOR FREEWhat Is A Good Debt-To-Income Ratio For A Mortgage?
A good DTI ratio for a mortgage in Australia varies among lenders. But the general guideline is:
- DTI of 3 or below: Considered great and indicates a strong financial position
- DTI between 4 and 5: Considered good, suggesting manageable debt levels.
- DTI above 6: Considered risky. The Australian Prudential Regulation Authority (APRA) identifies DTI ratios above 6 as higher-risk loans.
Lenders are often hesitant to approve the home loan, as the borrower might struggle with repayments if interest rates rise or there is a change in their financial situation.
The maximum DTI ratio accepted by the big four banks of Australia are:
- CBA: They monitor applications with a DTI higher than 4.5, while applications that are 7 DTI or higher need to be manually approved by their credit department.
- Westpac: For a DTI ratio of 7 or greater, your application will be referred to their credit department for further review.
- NAB: Their DTI ratio cap is 8 for all home loan applications.
- ANZ: Applications where the DTI ratio is greater than 7.5 will no longer be considered home loans by ANZ.
- Cut out or reduce unused debt facilities. For example, if your credit card limit is $2,000 and rarely used, consider cancelling it.
- Cut out unnecessary expenses and subscriptions.
- Create a budget and stick to it
- Consolidate your existing debts
- Consider borrowing a smaller loan amount
- Increase your income
- High-income stability such as income mainly comprising base income, net profit or other consistent sources.
- High employment stability with details of years in current employment, same industry or current business.
DTI For Non-Bank Lenders
Non-bank lenders, also known as non-Australian Deposit-taking Institutions (non-ADIs), are not regulated by the Australian Prudential Regulation Authority (APRA) and are not always required to enforce strict Debt-to-Income (DTI) limits. However, many still consider DTI ratios when assessing loan applications as part of their risk management practices.
At Home Loan Experts, we have access to a comprehensive panel of lenders and the tools needed to help you navigate these options and find the right fit for your financial needs.
Call us on 1300 889 743 or complete our free assessment form.
How To Improve My DTI
If the DTI ratio is 6 or higher or is not accepted by a lender, there are ways to lower it:
At Home Loan Experts, we can help you apply with a major lender if there are:
We will first discuss the specific circumstances that led to a high DTI ratio and if any other income sources can be included in the calculation. Once we’re satisfied that you can meet the repayments on the home loan without hardship, noting the high DTI, we’ll provide detailed comments backed up by strong evidence along with your loan application which is considered on a case-by-case basis.
We also have lenders on our panel that don’t have DTI caps and can present a strong case for you to increase your chances of home loan approval.
Struggling with a High DTI? We Can Help!
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