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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

Last updated: 27th March 2019 *

Many people ask us ‘how much debt is allowed when applying for a mortgage?’ – a question we set out to answer here in detail.

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

Here, we’ve taken a comprehensive look at how UK mortgage lenders determine their debt to income ratios, addressing the following topics:

If you need more in-depth mortgage guidelines regarding debt to income ratios, we have advisors we work with who can help.

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How do UK mortgage lenders calculate debt to income ratio?

Lenders define a debt to income ratio as your monthly debt payments divided by your gross monthly income (i.e. your income before taxes and other deductions are taken out).

Banks and building societies may include on their website a simple income to debt ratio calculator you can use to work out if you meet their financial requirements to take out a mortgage.

In order to calculate a debt to income ratio when applying for a mortgage, you need to first add up your recurring monthly debt – including your rent or mortgage payments, car loans, child support, credit cards and student loans. Some lenders will include the new loan, so it’s best to include your expected monthly payment.

Most lenders for Credit and Store Cards will assume the industry standard 3% minimum repayment when calculating your debt to income ratio.

Then tot up your monthly income. As well as your gross wages, don’t forget to include any other income you get from freelance work, for instance, and/or from things like child benefits.

Finally, divide the monthly debt by your monthly income and multiply this figure by 100.

Debt to income ratio example

Now that we’ve covered the definition of debt to income ratio and explained how it is calculated, it’s time to provide an example to put this into context.

So, for instance, if your debts come to £1,000 and your monthly income is £2,500, your debt-to-income ratio would be 0.4. Lenders express the figure as a percentage, arrived at by multiplying the ratio by 100. Hence, in this example the debt ratio to income is 40%.

Calculating debt to income for mortgage qualification

A lower percentage represents a good debt to income ratio. Whereas, a higher percentage indicates a bad debt to income ratio. Mortgage lenders are often concerned that borrowers with what is considered a bad debt to income ratio, are more likely to run into trouble making their monthly payments. This is especially so if there is room within your credit limits for your borrowing to increase even further.

How do debt to income ratios impact on you buying a house?

The debt to income ratio required to buy a house can vary from one lender to the next.

The mortgage provider will compare your essential outgoings to your income to help paint a picture of your ability to manage the monthly repayments. You can also calculate the figure yourself to check whether you’re in a healthy financial shape to take on a new loan.

Lenders will expect your monthly repayments to be covered by a certain percentage of your income. If your debts are less than this portion of your income, you should have a low enough household debt to income ratio to be accepted for a loan.

What is considered a good debt to income ratio for a mortgage?

There’s no ‘one size fits all’ answer as some lenders are more flexible than others, but generally speaking, the lower the better.

Some lenders will accept borrowers with a debt to income ratio of 45%, while others will expect it to be around 40% or lower, and a number of providers have no set maximum and assess things on a case-by-case basis.

Most lenders would generally consider anything between 20-30%, or less, to be low risk.

If your debt to income ratio is higher than 50%, most brokers would recommend taking action to decrease it - jump ahead to the section titled ‘How to reduce your debt to income ratio…’ for information on this or make an enquiry here.

Which debts count toward debt to income ratios?

There’s a whole range debt types that can be factored into the ratio of debt to income calculations. They include (but are not limited to)...

  • Credit card and store card debt
  • Outstanding loans (including student loans, car finance and more)
  • Mortgage payments
  • Child support

Lenders determine how much debt you can have to get a mortgage based on their own, in-house criteria. But they will also look at the spread of your credit i.e. the number and types of credit cards or loans you hold.

When lenders decide what is an acceptable debt to income ratio, they do pay heed to the circumstances around your debt. They 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 planning to pay off their debt or to those who’s debt balance has been consistently reducing.

Credit cards

If you have credit cards with outstanding debt on the, you’ll likely want to know how much credit card debt is OK when applying for a mortgage.

Mortgage lenders take into consideration your credit card balances when calculating your debt to income ratio. They also look at your credit limit – the total amount your credit card companies are prepared to lend you.

Lenders make a simple calculation by dividing your current debt by your credit limit to come up with what is called a ‘credit utilisation rate’, expressed as a percentage figure. It’s recommended that you keep your credit utilisation rate below 30%. Make an enquiry to speak with an advisor who can provide tips on this.

Student loans

If you have borrowed to fund your studies, you will likely want to know, do student loans affect debt to income ratio?

The situation is that your student loan is not included in your credit score, but it will be included in debt to income calculations.

So, in answer to the question ‘do student loans count against debt to income ratio?’ the answer is yes they do, but your priority might be on clearing any other debts you may have before making a mortgage application.

Other debts

Your current debt to income ratio is also determined by other debts, including your rent or mortgage payments, car loans and child support.

Some types of loans may be seen as lower risk by some lenders when they’re determining debt to income ratio. Car loans, for instance, particularly if you are dependent on your car to get you to work.

A typical debt to income ratio on a mortgage application will not include payday loans. Generally, banks and building societies will not lend to applicants who use this type of loan. However, your application may be reconsidered 12 months from fully paying up the loan.

Some banks and building societies will include the new mortgage loan in the calculation, so it’s best in this case to include your expected monthly payment.

Does debt to income ratio affect your credit score?

Your debt versus income ratio won’t affect your credit score. This is because the credit agencies do not 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.

So, what is an acceptable debt to income ratio for a mortgage?

Since lenders these days take a broader view of affordability, whether your debt to income ratio is consider acceptable may depend on your overall profile as a borrower and the mortgage provider’s appetite for risk.

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 No lenders likely to turn you down for a mortgage on debt to income grounds
Debt to income ratio 20% No lenders likely to turn you down for a mortgage on debt to income grounds
Debt to income ratio 30% Only a small minority of lenders have a maximum ratio requirement of less than 30%, and they tend to make a decision on whether the borrower’s exact ratio is acceptable on a case-by-case basis
Debt to income ratio 40%  A minority of lenders have a maximum debt to income ratio of 25-35%, and some of those will decide what’s acceptable on a case-by-case basis. Approximately two UK lenders have a maximum requirement of 45%.
Debt to income ratio 50% Approximately five UK lenders would be cautious of borrowers with a debt to income ratio of 50% or more. Expect greater scrutiny around affordability
Debt to income ratio 60% Approximately five UK lenders would be cautious of borrowers with a debt to income ratio of 60% or more. Expect greater scrutiny around affordability
Debt to income ratio 70% Approximately five UK lenders would be cautious of borrowers with a debt to income ratio of 70% or more. Expect greater scrutiny around affordability
Debt to income ratio 80% Approximately five UK lenders would be cautious of borrowers with a debt to income ratio of 80% or more. Expect greater scrutiny around affordability
Debt to income ratio 90% In addition to the approximate five lenders who are wary of borrowers with a debt to income ratio of over 50%, one has a maximum of under 85% and another 99% at the time of writing
Debt to income 100% Approximately 11 lenders would be wary of borrowers whose debt to income ratio is 100%, but the good news is that the majority of UK providers take a broader view of affordability (considering other factors such as credit history and income multipliers) and set no strict debt to income limits

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.

Can you get a mortgage with a high debt to income ratio?

Lenders vary a lot in the maximum debt to income ratio they will consider for mortgage loans.

A number of them are prepared to lend to applicants with a higher level of indebtedness, 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% i.e. those whose debts are greater than their income.

Some mortgage lenders don’t set a maximum debt to income ratio limits, preferring to base their decision to lend on affordability.

Commonly, a lender’s underwriters will assess affordability by considering a case on its own merits, factoring in the full range of your 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 LTV, type of debt and other credit history
  • A maximum pound figure in debt consolidation (e.g. one lender sets the maximum debt consolidation permitted at £30,000). Or accommodating a higher debt consolidation amount on condition that the debts have accrued through property improvements/development (In such cases, evidence will be required that the funds have been spent on property improvements.)
  • The debt consolidated does not exceed 20% of the mortgage balance
  • Determining affordability instead using income multipliers

At least one lender will deal with affordability issues at the Agreement in Principle (AIP) stage of your mortgage application, rather than referring you to an underwriter.

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%.

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

Generally speaking, the same debt to income rules will apply if you’re taking out a new mortgage or refinancing an existing one. A percentage that some lenders consider risky might be deemed acceptable by certain specialist providers.

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

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.

You can find more information about the criteria for remortgage applications here, or better yet, make an enquiry and the advisors we work with will go over all of you options and recommend the best course of action over the phone.

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

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.

You can read more about secured loans here.

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.

Conditions required of lenders approving lower debt to income ratios

Lenders with a lower debt to income ratio mortgage approval policy may still require certain other conditions to be met before they approve your 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  

Consult with the mortgage advisors we work with to discuss any special circumstances you may have when applying.

How to reduce your debt to income ratio before applying for mortgages

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, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 27th March 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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