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Debt-to-Income Ratio and Mortgages

How does your debt to income ratio affect getting a mortgage?

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 16th October 2019 *

If you want to get a mortgage while paying off credit, it’s crucial to understand how your debt-to-income ratio affects your mortgage affordability

Mortgage lenders often want to know how much debt you have in relation to what you earn, and they’ll try to gauge if you will be able to afford your monthly repayments on the mortgage product you’re applying for.

In this article, we’ve taken a comprehensive look at how UK mortgage lenders assess an applicant’s debt-to-income ratio. 

We’ll be covering the following points... 

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What is the debt-to-income ratio? 

To put it simply, your debt-to-income is used to calculate the amount of monthly payments you have in relation to your gross monthly income (i.e. your income before taxes and other deductions are taken out). It provides a picture of your essential payments to lenders, who will then use this to see if you fit their affordability requirements. 

Lenders determine how much debt you can have while still qualifying for a mortgage based on their own in-house criteria. 

Which debts count?

These debts could come from credit cards, loans, student loan repayments, child support, rent payments or current mortgage payments, and car finance all count, among others. They could even come from other forms of adverse, such as debt management plan repayments. 

Mortgage lenders will consider the circumstances around your debt and look at the spread of your credit, for example the number and types of credit cards or loans you hold. 

Mortgage providers will be more understanding about loans made to renovate your home or to cover a period of illness, for instance, as opposed to those accrued through simply overspending.

They will also be more amenable to applicants who can show how they are paying off their debt or to those whose debt balance has been consistently reducing.

What’s a good debt-to-income ratio for a mortgage?

Generally speaking, the lower your ratio, the more favourably lenders will look on you. Most lenders view between 20-30% as being low risk, so they could offer better rates to borrowers. 

While some lenders have no set maximum and will assess applications on a case-by-case basis, others may accept a debt-to-income ratio of less than 45%.

If your debt-to-income ratio is higher than 50%, most brokers would recommend taking action to decrease it by clearing a credit card or other unsecured finance. 

To give you a general idea of the debt-to-income limits some mortgage lenders set, the table below gives an overview of the approximate number of lenders that will accept specific debt-to-income ratios, based on multiples of 10.

Ratio How many lenders will accept?
Debt to income ratio 10% or less Almost all lenders will look on your application favourably (depending on other parts of your application)
Debt to income ratio 20% Almost all lenders will look on your application favourably (depending on other parts of your application)
Debt to income ratio 30% Good chance of getting accepted. Only a handful of mortgage lenders have a maximum ratio requirement of less than 30%
Debt to income ratio 40% A smaller number of lenders won’t accept a ratio of 40% or more. If your application is good, many would accept a 40% debt-to-income ratio.
Debt to income ratio 50% Mortgage lenders may be cautious of borrowers with a debt-to-income ratio of 50% or more. Expect greater scrutiny around affordability
Debt to income ratio 60% A smaller selection of mortgage lenders will accept applicants with a debt-to-income ratio of 60% or more. Expect greater scrutiny around affordability
Debt to income ratio 70% A smaller selection of mortgage lenders will accept applicants with a debt-to-income ratio of 70% or more. Expect greater scrutiny around affordability
Debt to income ratio 80% A smaller selection of mortgage lenders will accept applicants with a debt-to-income ratio of 80% or more. Expect greater scrutiny around affordability
Debt to income ratio 90% A large number of mortgage lenders will be wary of borrowers with a 90% debt-to-income ratio
Debt to income 100% Mortgage who do not heavily rely on your debt-to-income ratio may be a good alternative. They will assess your case on other affordability factors

The information in the table above is strictly for example purposes and was accurate at the time of writing. For the latest figures and criteria information, get in touch and the advisors we work with will bring you up to speed.

How do I calculate my debt-to-income ratio for a mortgage?

To calculate your debt-to-income ratio when applying for a mortgage, you’ll first need to add up your recurring monthly debt. Next, add up your monthly income and gross wages – this can include money earned from freelance work or child benefit, if applicable.

Finally, divide your monthly recurring debts by your monthly income, then multiply this figure by 100. 

So, for example, if your debts came to £1,000 per month and your monthly income is £2,500, your debt-to-income ratio would be 40%. 

How does my debt-to-income ratio affect my mortgage affordability?

The debt-to-income ratio is one of the most important factors for calculating the potential size of your mortgage loan. However, the debt-to-income ratio required to buy a house can vary from one lender to the next.

Mortgage lenders will expect your monthly repayments to be covered by a certain percentage of your income, and most will have a maximum debt-to-income ratio that they’ll lend to. 

A financial advisor can help you calculate your debt-to-income ratio and check whether you’re in healthy financial shape to qualify for taking out a mortgage loan. 

Make an enquiry and we’ll match you with an expert who can calculate your debt-to-income ratio and advise on your next steps. 

Does my debt-to-income ratio affect my credit score?

Your debt versus income ratio won’t affect your credit score. This is because the credit agencies don’t know how much money you earn, so they are not able to make the calculation.

However, your debt-to-income ratio is an indicator of your overall credit health: the higher the ratio, the assumption is that you have a poorer credit score compared with someone with a lower debt-to-income score. 

Can I get a mortgage with a high debt-to-income ratio?

It may be possible. Each mortgage lender has a different maximum debt-to-income ratio they will consider for mortgage loans. Most lenders will lend below 100% debt-to income ratio. 50% is a common limit, but some lenders are more cautious. At the time of writing, only one lender does not lend to applicants with a debt-to-income ratio above 25%.

A number of mortgage providers are prepared to lend to applicants with a higher level of debt, instead paying more attention to the circumstances around the loans they have taken out. These lenders offer the best debt-to-income ratio for home loans, considering applicants with ratios over 100% – those whose debts are greater than their income.

Some mortgage lenders prefer to let underwriters assess a borrower’s affordability by considering the case on its own merits while factoring in their debts. 

Underwriters may employ various benchmarks, including:

  • Reviewing cases above a 50% debt-to-income ratio to take into consideration other risk factors such as loan-to-value, type of debt and other credit history
  • A maximum monetary figure in debt consolidation (e.g. one lender sets the maximum debt consolidation permitted at £30,000)
  • Accommodating a higher debt consolidation amount on condition that the debts have accrued through property improvements/development
  • The debt consolidated does not exceed 20% of the mortgage balance
  • Determining affordability instead using income multipliers

Some lenders may deal with any affordability issues at the agreement in principle (AIP) stage of your mortgage application, rather than referring you to an underwriter.

Can I refinance a mortgage with a bad debt-to-income ratio?

Yes, you may be able to. The same rules generally apply if you’re taking out a new mortgage or refinancing an existing one. 

If your debt-to-income ratio has risen significantly since you took out your mortgage, refinancing with the same provider might be difficult, though it all depends on how flexible they’re willing to be. 

It is, however, possible to remortgage with a new lender, as you may be a better fit for their affordability and eligibility criteria. 

If you have re-mortgaged once to consolidate debts then you’ll be subject to extra scrutiny from underwriters and they may apply a lower debt-to-income threshold.

Make an enquiry and the advisors we work with can talk you through your options and search the whole market to find the best deals.

What is the acceptable debt-to-income ratio for a secured loan?

Secured loans (also known as homeowner loans) are secured against your property as a second charge debt and they function like a second mortgage. 

As the lending criteria is usually more flexible for these products, it may be possible to obtain one with a higher debt-to-income ratio than most mortgage providers would accept.

This could make a secured loan a viable option for capital raising if you’ve been turned down for a remortgage because your debt-to-income ratio is too high.

Speak to an expert for more information about secured loans. 

What about personal loans?

Lenders who provide personal loans will also be mindful of your debt-to-income ratio, as those with a higher percentage are generally considered higher risk, and more likely to default than borrowers with a lower ratio.

As is the case with mortgages, what one lender considers risky, another might be willing to accept depending on their appetite for risk.

Make an enquiry to speak with an advisor for specialist advice, more information about personal loans, and access to the right lender for you.

What conditions do I have to meet to satisfy lenders with a lower debt-to-income ratio?

Lenders who only approve of applicants with a lower debt-to-income ratio may still require certain other conditions to be met before they approve a mortgage application.

Some lenders may decline a mortgage loan, for instance, if:

  • You exceed their maximum debt-to- income ratio, even if you repay in part or in whole your unsecured debts before completion
  • You have loans that have more than a set amount of months to run
  • You need a certain level of credit repair (they may, though, consider your application on a lower debt-to-income ratio rating)
  • Your debts include a student loan

Make an enquiry and speak with one of the experts we work with to discuss any special circumstances you may have when applying.

How can I reduce my debt-to-income ratio before applying for a mortgage?

There are a number of ways that you can lower your debt-to-income ratio, including:

  • Avoiding taking on more debt
  • Paying off as much as you can on high-interest credit cards and consumer debt
  • Closing unused credit card and loan accounts
  • Not making any big purchases on credit prior to buying a home
  • Increasing your income. Overtime, commission, bonus payments and wages from a second job or money earnt from freelance work can all reduce your debt-to-income ratio

These are merely a handful of the ways you could potentially reduce your debt-to-income ratio before applying for a mortgage. Make an enquiry to speak with an expert broker who can offer bespoke advice on the best course of action.

Speak to a mortgage expert about debt-to-income ratios

If you have questions and want to speak to an expert for the right advice, make an enquiry.

The expert brokers we work with are whole-of-market, meaning that they can find the best deals for you from a wide selection of mortgage lenders. 

We don’t charge a fee, there’s no obligation to invest, and there are no marks made against your credit rating. 

Updated: 16th October 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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Mortgage Affordability