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Debt-to-income ratio explained

Joe Minihane
Written by  Joe Minihane
Jonathan Leggett
Reviewed by  Jonathan Leggett
5 min read
Updated: 15 Mar 2024

What does debt-to-income ratio mean? How do lenders use it to make decisions on your credit-worthiness? And how you improve yours? Read on and we'll fill you in.

What is a debt-to-income ratio?

Put simply, your debt-to-income ratio, known widely as DTI, is the amount of your monthly gross income used to pay off debts such as mortgage costs, credit cards and personal loans.

It can be an excellent way to look at your overall financial health and works as a good indicator of how much you can afford to borrow if you’re looking to make a move or need more credit for an important purchase.

couple looking at finances

Why is my DTI important?

Your DTI is an important way for lenders to work out whether you can afford to take on more debt, such as a higher mortgage or a finance package to cover the cost of a new car.

It offers a simple method for them to get a good understanding of your finances and whether you can be viewed as a safe pair of hands when it comes to making timely repayments on any loans.

How is debt-to-income ratio calculated?

Debt-to-income ratio is easy to calculate. Use your statements to add up all of your monthly debt costs, including rent or mortgage payments, council tax arrears, as well as credit card and loan bills.

Then divide that number by your monthly gross income, the amount you earn before tax - this can be found on your payslip or, if you’re self employed, the gross amount you are paid before setting aside money for tax.

Take the figure you get and multiply by 100 to get a percentage figure which represents your DTI ratio.

If you are a couple, lenders will consider both of your incomes as counting towards your DTI.

What types of debt are included in a debt-to-income ratio?

When calculating your DTI, you need to be aware of the kinds of debt that need to be included. Typically these are:

  • Mortgage payments

  • Rent if you do not own your home

  • Car finance outgoings

  • Credit card bill

  • Personal loan costs

  • Council tax arrears

  • Overdraft

  • Student loans

  • Child support and maintenance

Example of a DTI

This simple DTI calculation gives you a clear idea of how to get a DTI ratio

  • Mortgage - £1,000

  • Loan repayment - £100

  • Credit card bill - £50

  • Car finance - £300

  • Student loan - £100

  • Total - £1,500

Gross income £3,500

Debt (£1,550) divided by income (£3,500) = 0.44 x 100 = 44% DTI

What is a good debt-to-income ratio?

As a rule of thumb, the lower your DTI ratio or percentage, the better.

A low percentage means that lenders, especially mortgage companies, will look on you more favourably, as you spend less on servicing debt and have more money available to cover any larger loans that you take out.

Anything between 0% and 39%, which ranges from very low to acceptable risk, should be seen as a good DTI.

Between 40% and 49% and you’re likely to have your credit report checked and have a good credit history.

Above 50% may see you deemed high risk, meaning bigger checks and worse interest terms, while anything beyond 75% is likely to require a specialist lender or even lead to outright rejection.

How can I improve my DTI?

On paper, there are a few ways you can improve your DTI, although in practice this requires work on your part. This includes:

  • Paying off debt - put simply, the less debt you have, the better your DTI

  • Boost your income - the more money you bring in, whether through a sideline or a promotion at work, will give you an improved DTI

  • Downsize - if you own a smaller home and you pay less in mortgage or rent, then your DTI percentage will be less

How do lenders use debt-to-income ratios?

A DTI can give lenders a quick understanding of your financial situation.

Based on payslips, tax returns and bank statements, they can get a good steer on what your DTI is and assess whether you can afford a new mortgage or loan.

Remember, lenders may also want to look at your credit rating as well. This is a separate figure which shows whether you are capable of paying off debt and looking after your money.

Along with a credit report, it can also be used to assess affordability for mortgages and other products.

Other useful guides

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