Debt-to-income ratio explained
Key takeaways
Your debt-to-income ratio (DTI) is the percentage of your monthly gross income that goes towards paying debts
Lenders use DTI to determine if you can handle additional debt, on top of your existing monthly debt payments
Maintaining a low DTI is beneficial for securing loans and managing finances effectively
What is a debt-to-income ratio?
Put simply, your debt-to-income ratio (DTI) is the amount of your monthly 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 move home, finance a new car, or need credit for an important purchase, such as a new mobile phone.
Why is my DTI important?
Your DTI is an important way for lenders to assess whether you can afford to take on more debt, such as a larger personal loan or a credit card with a higher limit.
It gives lenders a simple way to compare your existing debt payments with your income and understand how much of your available income is already committed to debt.
A higher DTI can suggest you have less room in your budget to manage additional repayments, while a lower DTI may indicate you have more capacity to take on further borrowing.
Lenders can use this alongside other information when assessing your application and ability to keep up with repayments.
Does DTI affect credit score?
Not directly. Having debts or using credit isn’t necessarily a bad thing, particularly if you manage your borrowing responsibly.
Your DTI isn’t recorded as a separate figure on your credit report, but if you start missing or making late repayments on your debts it can damage your credit score.
In contrast, making payments on time can help build or maintain a positive credit history.
How is debt-to-income ratio calculated?
To work out your debt-to-income ratio you need your bank statements and a calculator.
Use your statements to add up all of your monthly debt costs, including rent or mortgage payments, council tax and car finance payments, 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.
Why use gross not net income?
DTI typically uses gross income because it provides a consistent measure of earnings before tax and other deductions, making it easier for lenders to compare borrowers’ debt levels.
Using gross income also avoids differences in individual tax circumstances distorting the calculation, although potential lenders may consider your disposable income and affordability separately.
What types of debt are included in a debt-to-income ratio?
When calculating your DTI, the following debt is typically included:
Mortgage payments
Rent, if you do not own your home
Car finance outgoings
Credit card repayments
Buy Now, Pay Later repayments
Personal loan costs
Council tax arrears
Overdraft
Student loans
Child support and maintenance
Exactly what is included can vary between lenders and the type of borrowing you’re applying for. Some lenders may also consider other regular financial commitments when assessing affordability.
Example of a DTI
This simple DTI calculation gives you a clear idea of how to get a DTI ratio
Deductions:
Mortgage - £1,000
Loan repayment - £100
Credit card bill - £50
Car finance - £300
Student loan - £100
Total - £1,550
Monthly income (gross): £3,500
Debt (£1,550) divided by income (£3,500) = 0.44 x 100 = 44% DTI
What is a good debt-to-income ratio?
There is no universal DTI threshold that guarantees acceptance or rejection, but as a general rule of thumb, the lower your DTI ratio, the better.
A DTI below 30% is generally considered relatively low, while 30% to 40% could be viewed as a moderate level of debt.
Once your DTI reaches 40% to 50% or more, you may have less capacity to take on additional borrowing, although lenders will assess this alongside your income, outgoings, credit history and other circumstances.
Which lenders accept a high debt-to-income ratio?
There is no definitive list of lenders that accept a high debt-to-income (DTI) ratio, as criteria vary by lender and mortgage product.
A few lenders do publish DTI criteria. Metro Bank and the Family Building Society for example, state that they have no maximum DTI for certain lending, while Atom bank declines applications where unsecured DTI is 50% or more. A broker can help identify lenders whose criteria fit your circumstances.
How can I improve my DTI?
There are a few ways you can improve your DTI, including:
Paying off debt – put simply, the less debt you have, the better your DTI
Boosting your income – the more money you bring in, whether through a sideline or a promotion at work, will give you an improved DTI
Downsizing – if you move to a smaller home and you pay less in mortgage or rent, then your DTI percentage will be less
Reducing credit card balances – paying down your credit card balances can reduce your monthly debt commitments
Avoiding new debt – taking on additional loans, finance or other credit could increase your DTI
Extending your loan term – extending the term of an existing loan could reduce your monthly repayments and therefore your DTI, although you could pay more interest overall
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, and what interest rates would be manageable for you.
Remember, lenders may also want to look at your credit rating as well. This is a separate measure based on information in your credit report that can help lenders assess how you have managed credit in the past.
Along with a credit report, DTI can also be used to assess affordability for mortgages and other products.
Will lenders check my DTI before a Decision in Principle?
Lenders can take your DTI into account when assessing a Decision in Principle (DIP) for a mortgage. They are likely to ask for information about your income, monthly expenses and existing debts, which allows them to assess affordability.
It’s worth noting that a DIP isn't a final mortgage approval. A lender can reassess your affordability during the full application and change the amount it is willing to lend.
Other useful guides
Nurture your credit score with Credit Score
You can check your score and credit report for free as often as you like with MoneySuperMarket’s Credit Score.
Watch your credit score grow and get alerts if there is any suspicious looking activity on your file – so you can avoid being the victim of fraud.
You’ll also receive regular updates and free tips and advice on how to keep improving your score.
Author
Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
Reviewer
Alan Cairns
Senior Content Editor
Alan breaks down money, home, and energy topics into plain English to help you save money. Ask him about pound cost averaging or Balkonkraftwerk.
