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Last Updated: 31st July, 2024

A debt-to-income ratio (DTI) or loan-to-income ratio (LTI) is a way for banks to measure your ability to make mortgage repayments comfortably without going into financial hardship.

While it’s an adequate stress test for approving home buyers, it doesn’t always make sense for property investors, who can simply sell their investment property if necessary.

What Is Debt-To-Income Ratio?

Essentially, your DTI ratio takes into consideration 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 each (\$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.

What Is A Good Debt-To-Income Ratio For A Mortgage?

Each lender has its own DTI ratio that it considers safe for a home loan applicant to have. Many lenders consider a DTI ratio of six or below to be acceptable. If the DTI ratio is more than six, 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.

Debt-To-Income Ratio Calculator

Use the calculator below to determine your debt-to-income ratio

Disclaimer: This calculator has several assumptions and simplifications and so should be used as a guide only. Please seek independent financial advice and your own circumstances before making any decisions about your home loan repayments.

How To Use The Debt-To-Income Ratio Calculator

This calculator is divided into three sections: 1. Income Details
• If you’re a PAYG applicant, input your gross income and any additional PAYG income
• If you’re a self-employed applicant, input your net profit before tax and any interest and dividend addbacks.
• You also can input rental income (the income you earn from your rental property.
2. Debts and Liabilities
• Input details of any existing mortgages you have, credit cards, car and personal loans and the value of the new home loan you require
3. Results
• You will get your DTI score here. Depending on your DTI score, you will get recommendations on how to proceed.

What Is The Max Debt-To-Income Ratio Accepted In Australia?

The maximum debt-to-income ratio differs from lender to lender.
• Non-bank lenders: Non-Australian Deposit-taking Institutions (ADIs) do not always apply DTI limits, because they are unregulated by the Australian Prudential Regulation Authority (APRA). However, they will often take DTI ratio limits into consideration when assessing loans. Our Home Loan Experts have all the tools regarding our large panel of lenders.
• ANZ: Applications where the DTI ratio is greater than 7.5 will no longer be considered home loans by ANZ.
• Commonwealth Bank: 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.
• National Australia Bank: Their DTI ratio cap is 8 for all home loan applications.
• Westpac: For a DTI ratio of 7 or greater, your application will be referred to their credit department for further review.
• Other lenders: Other major and smaller banks and lenders set their own DTI ratio benchmarks, and are broadly in line with major banks.

We know how to get your home loan approved in this new debt-to-income ratio environment.

What Is A High Debt-To-Income Ratio?

Generally speaking, a DTI higher than six times a borrower’s’ income (6 DTI) is considered a higher risk that you will be put under financial stress if:

• Your financial situation were to change suddenly; or
• Interest rates were to rise dramatically.
A high DTI ratio can be a signal that the borrower has too many debts and liabilities for the amount of income they earn. On the other hand, a low DTI of six and below demonstrates a good balance between income and debt. It signals that you can manage your debts and repay loans on time without financial stress.

How Can We Help If You Have A High DTI?

In cases of a high DTI ratio, we can usually help you apply with a major lender if there’s:

• 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.
• We’ll first discuss your specific circumstances contributing to the high DTI ratio, such as relocation, bridging loans, or other incomes that cannotto be included in the calculations.

Once we’re satisfied that you’re able to 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.

However, quite a few lenders don’t have DTI caps and we work with them.

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.
• Company, partnership and trust liabilities.
• Other outgoing liabilities.

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.

Who Is Affected By Debt-To-Income Ratios?

On face value, it makes sense that lenders would want to limit how much they allow you to borrow based on your income-to-debt ratio.

For example, if you earn \$100,000, you generally cannot borrow more than \$600,000.

This is a responsible lending practice for standard homeowners, but for an investor, it’s not always reasonable when considering their long-term plans.

For example, they may be making interest-only payments for the first three years so they can maintain their cash flow for further investment opportunities.

Alternatively, they may be pursuing a negative gearing strategy.

The bottom line is that DTI caps don’t make sense for property investors because they can simply sell one of their investment properties if they are unable to afford their mortgage repayments.

Why Did APRA Introduce Stricter DTI Benchmarks?

Back in 2014, APRA forced lenders to limit investment loan growth to 10 per cent per year.

This was primarily for highly-geared investors with high debt-to-income ratios.

Interest-only loans were particularly wound back, with approvals limited to 30 per cent of a lender’s total loan book.

This speed limit was removed in May 2018 as APRA became more satisfied with the ratio of investment loans compared to owner-occupied loan approvals.

Despite this, 2018 APRA data found that 10% of new home loans were over 6 LTI and accounted for around 31% of the value of new property loans in recent years.

Despite this, 2018 APRA data found that 10% of new home loans were over 6 LTI and accounted for around 31% of the value of new property loans in recent years.

The speed limit might be gone but the regulator is still pushing banks to limit credit growth for highly-geared borrowers.

Lenders first tried to do this by increasing investment rates for existing borrowers but they faced a lot of backlash, and good borrowers were unable to afford the home loan repayments.

Instead, many lenders introduced approval benchmarks based on DTI caps of around 6 or 7. Along with this cap, lenders are now required to make more reasonable enquiries into living expenses than borrowers were previously required to declare.

Sharper Focus On Living Expenses Is The New Normal

Your debt-to income-ratio is one thing but the way banks consider your living expenses is now more important than ever.

In fact, high living expenses can make or break your application along with a high DTI.

Try our living expenses calculator to get an idea of how you stack up as a home loan borrower.

How To Reduce Debt-To-Income Ratio

To prepare for your home loan application, it’s usually best you cut out or at least reduce unused debt facilities.

For example, if you have a \$2,000 limit on your credit card but find that you rarely use this amount per month, consider cancelling it.

Another example is expenses that aren’t vital and can be easily cut from your spending such as entertainment subscriptions, going to the pub, gym memberships, going to music festivals or sporting events, or simply eating take-away on a regular basis.

Please call us on 1300 889 743 or fill in our free assessment form and we can weigh up your home loan options.