Calculating Your Debt to Income Ratio
Want a better understanding of how debt-to-income ratios can affect your mortgage application? Read on to find out more.
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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.
Speak to an expert about how your debt-to-income ratio affects mortgages
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.
Debt to Income Ratio Calculator
You can use our debt-to-income (DTI) ratio calculator to work out how much of your income is going towards your fixed outgoings, expressed as a percentage. Based on that percentage, this tool will tell you whether mortgage lenders will class your DTI as low, medium or high.
Your Debt to Income Ratio is %
Good news! Most mortgage lenders will class your debt-to-income ratio as low. You’re unlikely to be declined for a mortgage based on your outgoings, but speaking to a mortgage broker before applying is still recommended as they can improve your chances of getting the best deal.
Most mortgage lenders will class your debt-to-income ratio as moderate, which means some of them might view your application with caution. Some lenders are much more strict than others when it comes to affordability and debt, so it’s important for you to find a lender who’s more lenient. You should speak to a mortgage broker before you apply to ensure you’re matched with a lender whose criteria you fit.
Most mortgage lenders will class your debt-to-income ratio as high. But that’s where we can help! With so much of your monthly income going towards debt repayments, you could struggle to get approved for a mortgage without the help of a mortgage broker. We can help you find a lender who’s more lenient on debt and affordability, and could still secure a mortgage approval.
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.
|DTI ratio||What are your chances of approval?|
|20% or less||Almost all lenders will look at your application favourably (depending on other parts of your application).|
|20-40%||You have a good chance of approval. Only a handful of mortgage lenders have a maximum DTI ratio of less than 40%.|
|40-60%||Expect greater scrutiny from lenders. Several have a maximum DTI ratio of 50%, so you may wish to aim for this level before making your application.|
|60-80%||A small selection of mortgage lenders will accept applicants with a debt-to-income ratio at this level. Your credit history and deposit size will be considered, and the context for your debts.|
|80-100%||Most mortgage lenders will be wary of borrowers with a DTI ratio over 90%, but some do not heavily rely on this metric and will consider applications on a case-by-case basis.|
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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).
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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.
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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.
There’s no specific figure at which your debt becomes unacceptable for a mortgage, but high monthly debt repayments in relation to your monthly income can impact your application. To find out more, read our guide to getting a mortgage when in debt.
Yes, your mortgage repayments are included in the calculation of your debt-to-income ratio, along with all other debts, such as your student loan, credit card debts, personal loans, car finance, etc.
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