Debt-to-Income Ratio: What is Your DTI?

Your debt-to-income ratio can help you understand how much of your income is allocated to your debts each month. It’s also one of several important financial indicators that lenders use to evaluate your application for credit, such as a mortgage or personal loan, and how likely you are to repay what you borrow.

What is a debt-to-income ratio?

Note: The term “DTI” is more common in the U.S. In Canada, lenders typically reference two debt ratios: total debt service ratio (TDS) and gross debt service ratio (GDS). Still, knowing how DTI works in general can help when thinking about how to manage your own debt ratios.

Your debt-to-income ratio, DTI, expresses the percentage of your gross (before-tax) monthly income that goes toward debt payments, like credit card bills, auto loans and student loans.

DTI is a calculation used by some lenders to determine your borrowing risk.

However, DTI is only one factor lenders use to decide whether you qualify for a loan. Your credit score, employment history, the size of your down payment (if it’s a mortgage or car loan, for instance), loan term and financial assets are other factors that will also be considered.

You can calculate your debt-to-income ratio by dividing your total monthly debt payments by your monthly gross income and multiplying the answer by 100%. The result is your debt-to-income ratio percentage.

Here’s an example. Let’s say your monthly debt payments total $1,200 and your gross monthly income is $3,500.

$1,200 / $3,500 = 0.34, or a DTI of 34%.

This means approximately 34% of your gross monthly income goes toward debt payments.

What is a good debt-to-income ratio?

The debt service ratios considered by Canadian lenders — GDS and TDS — are similar to DTI, though the term is a bit more intuitive because it uses the cost of servicing (or paying for) your debt, rather than the actual amount of the debt.

GDS and TDS are most commonly used by mortgage lenders to evaluate potential borrowers, but other types of lenders may use them too.

Your GDS includes:

Mortgage payments.
Property taxes.
Heat costs.
50% of condo fees, if applicable.

Many mortgage lenders require a GDS of no more than 39% of your gross monthly income.

Your TDS includes everything in the GDS calculation plus other debt payments, such as on:

Credit card balances.
Car loans.
Student Loans.
Lines of credit.
Child or spousal support.
Any other debt.

Many mortgage lenders require your TDS to be 44% of your gross monthly income.

🤓 Nerdy Tip: If your GDS and TDS exceed these requirements, you may still qualify for a loan, depending on the individual lender and the type of loan you’re trying to get, but you may face restrictive loan limits or higher interest rates.

Why your debt-to-income ratio is important

Your debt-to-income ratio shows how much of your income goes toward paying down debt each month.

Lenders use this calculation to determine whether they want to lend you more money — increasing your debt — at your current rate of income.

The limits of a DTI or debt service ratio

Although it’s one factor lenders consider when deciding whether to approve your loan application, your debt-to-income or debt service ratio doesn’t tell you — or a lender — everything about your financial health.

Most notably, it doesn’t differentiate between high-interest debt, such as credit card balances, and lower-interest debt, such as lines of credit.

It also only looks at your debt repayment obligations, and doesn’t factor non-debt expenses, like groceries, child care or utility bills. It also doesn’t factor in unexpected expenses. Your debt-to-income ratio could suggest you have more flexibility to pay back debt than you actually have.