Aaron Bell
Beth Buczynski
A debt-to-income (DTI) ratio is a measurement of debt relative to income and is calculated by dividing your total debt by your annual income.
What does DTI mean for lending?
When you apply for a home loan or any other type of credit, the lender’s primary concern is your ability to pay the money back.
A DTI ratio provides lenders with a clearer understanding of how much debt you already have, in contrast to how much money you earn.
The higher your DTI, the higher the risk to the lender.
What’s a good DTI ratio?
Lenders have different views of what a healthy DTI ratio is; APRA considers loans with a total DTI ratio of 6 or more as higher-risk loans. This doesn’t prevent lenders from providing loans to those with high 6 or higher, but it does act as a benchmark.
Individual circumstances will also affect how a lender views your DTI, but as a general guide:
- A DTI of 3 or below is very good
- A DTI of 4 to 5 is good but not great
- A DTI of 6 or more is generally considered risky.
» MORE: What else determines home loan eligibility?
Australia’s average DTI
When looking at Australia as a whole, the average household debt is currently $261,492, according to the latest figures from the Australian Bureau of Statistics. The average combined household income is $139,064. This means the average DTI ratio is approximately 1.88, which is comfortably below APRA’s 6.0 benchmark.
The ABS also provides data on debt and assets based on age. The table below shows that debt ratios are the highest amongst those aged 35-44, and lowest amongst those over 65.
| Age | Debt ratio compared to the average of all households | Deposit asset ratio compared to the average of all households |
|---|---|---|
| 15-24 | 0.28 | 0.30 |
| 25-34 | 1.14 | 0.49 |
| 35-44 | 1.73 | 0.53 |
| 45-54 | 1.51 | 1.02 |
| 55-64 | 0.93 | 1.34 |
| 65+ | 0.18 | 1.49 |
How to calculate your DTI ratio
Total Debt ÷ Annual Salary = DTI
When calculating your total income and debt, it’s important to remember the various forms of income and debt that a lender will consider.
Types of income included
- annual salary
- self-employed income
- dividends from investments
- rental income from an investment property
- additional side work like freelancing/contract work
- bonuses.
Types of debt included
- credit card debt (amount owing)
- home loans (the amount you’re applying for, if you don’t currently own a home)
- personal loans
- car loans
- investment loans, lines of credit and/or margin loans
- HECS/HELP University loans
- tax debt.
DTI calculation examples
Example 1:
Debt: You have $480,000 remaining on your home loan and $20,000 remaining on a car loan, so your total debt is $500,000.
Income: Your annual income is $100,000.
Your DTI ratio is $500,000 ÷ $100,000, which is 5.
This means your debts are currently five times more than your annual salary.
Example 2:
You can also calculate your DTI ratio as a couple. In this case, you would combine all debts and income to determine your ratio if you and your partner were looking to borrow money together.
Debt: You have an outstanding mortgage of $600,000, credit card debt of $10,000 and a car loan of $20,000.
Income: Ronald earns $70,000 annually while his partner Charlie earns $100,000.
Their combined income is $170,000 and their combined debt is $630,000.
DTI Ratio is $630,000 ÷ $170,000, which is 3.7.
DTI limits for mortgages in Australia
Australian lenders use individual benchmarks when assessing the DTI ratio of potential customers.
Big Four Banks
NAB: 8.0 for high-risk applicants, 9.0 for others
CBA: CBA does not have a listed limit, but requires manual approval for a DTI ratio over 7.0.
ANZ: 7.5
Westpac: DTIs of 7.0 and above are sent to the Westpac credit team for manual assessment
These limits may have wriggle room depending on the type of loan and how much you want to borrow. You may also be able to get around a poor DTI with the help of a co-borrower and in limited circumstances, a guarantor.
» MORE: 7 tips for home loan approval
How to manage and improve your DTI
If you are struggling to get a loan approved or have calculated your own DTI and realise it is above the threshold considered risky by lenders, you can lower your ratio using various strategies.
- Consolidate and reduce existing debt. For any mortgage application, reducing your existing debt is an important step to showing a lender you are a reliable customer. If you have existing credit card debt, personal loans and a car loan, paying these off will improve your loan eligibility and lower your DTI ratio.
- Increase your income. Increasing your income will also improve your DTI. This could be by earning bonuses at your job, negotiating a higher salary, or picking up a second income. If you are scheduled for a raise, waiting until it kicks in before applying for a home loan can help lower your DTI.
- Aim for a cheaper property. This won’t lower your DTI but it can improve your chances of approval, especially if you have a larger deposit. A high DTI could be offset if you have a larger deposit because it ultimately means you are borrowing less with a better LVR.
- Guarantor. A guarantor will also not impact your DTI but will show a lender you have security should you be unable to make repayments.
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