Of the many ways mortgage lenders use to ascertain risk and affordability, your debt to income ratio is one of the easier ones for you to personally calculate. By doing so, you can make a quick understanding of your own finances, and put in place any steps necessary to improve your mortgage viability for a future application - or simply relax, knowing that you have your debt under control.
How to calculate debt to income ratio
Debt to income ratio (DTI) is calculated as the following:
(total monthly debt payments) / (total gross monthly income)
Multiply this amount by 100 to convert it to a recognisable percentage.
But what counts towards your total monthly debt payments, and are there hidden things that make up your total gross monthly income?
What counts as debt?
Debt can be relatively difficult to define. For example, when calculating DTI mortgage companies like to include your current mortgage payment, but if you are currently renting, that’s not a debt. Other borrowings, such as an overdraft, are classed as debt but don’t necessarily have a monthly payment. So what does count as recurring monthly debt?
Your housing costs
If you are looking for a mortgage, the amount your prospective lender is going to use is the cost of the mortgage you are going to get. So even if you are renting (technically not a debt) or planning on selling the house you are in, use the monthly repayment value for the mortgage you are planning to get. Don’t know what that is? Use our mortgage repayment calculator to work out a good estimate.
Credit card bills
A rule of thumb is to calculate based on your monthly minimum payment, though this can be misleading and it’s better to go a little higher as minimum payments don’t show real intention to clear the debt.
A more accurate calculation would be 1.5x your monthly minimum payment.
Vehicle finance
Whether you have bought a car on finance or lease a car, include this total. You do not need to include the amount paid in insurance or vehicle excise duty (road tax), nor your monthly fuel bill.
Personal loans
If you have any unsecured personal loans with either a bank, peer-to-peer lending service or other provider, add the monthly payment to the total.
Overdraft
If you are constantly living using an arranged overdraft, then you will be putting your chances of a mortgage at risk. It is worth prioritising paying back an overdraft in full as soon as possible.
As an overdraft won’t typically have a monthly repayment, it is hard to calculate an accurate figure here, but include a value equal to the interest and fees you pay each month, plus an amount around 3% of the overdraft level (£15 for every £500 of overdraft).
Student loans
Add the monthly outgoing of any outstanding student loan payments.
Regular maintenance or financial support payments
If you are paying any sort of regular financial support for your children, make sure to include it in the total.
If this amount fluctuates, aim for a realistic average.
Debt management payments
If you are currently making payments towards a debt management plan, either legally structured or informal, be sure to include that to the total.
Other debt
Other debt can include repayments to HMRC, or benefit overpayments; regular undocumented loan repayments to family or friends; council tax arrears etc.
What doesn’t count as debt?
Regular utility bills, mobile phone contracts, subscription services (Netflix, Spotify, Amazon Prime etc.) do not count as debt and do not need to be included.
Your gross monthly income
On the other side of the equation is your income. This is calculated based on your gross (pre-tax, pre-pension) monthly income.
Your earnings
If you are salaried, simply add your annual salary divided by 12.
If you are paid weekly, make you estimation based on your weekly amount multiplied by 4.3.
A daily income should be multiplied by 22.
Remember to make all calculations before deductions are made for tax.
Your benefits
Child benefit, tax credits, income support, disability benefits - all benefits count towards your income, so work out their monthly value to you and include them here.
Any incoming maintenance payments
Add any money that is regularly paid to you from any ex-partner for child support.
Additional earned income
If you gain any earnings in addition to your main paypacket, be sure to add these extra values to your total. These could be:
- Sales commission
- Company bonuses
- Tips
- Extra freelancing or contracting work
Debt to income (DTI) ratio examples
Example one:
Debts:
- A proposed mortgage of £780 per month
- Credit card minimum payment of £100 so monthly debt of £150
- Car lease total £305 per month
- Overdraft of £1000, interest and fees approx. £50 per month. Monthly debt set to £80.
Income:
- Regular salary of £45,000 p.a., converts to £3,750
- Child benefit for one child: £89 per month
Total debt: £1,315
Total income: £3,839
DTI ratio: 34.25%
Example two:
Debts:
- A proposed mortgage of £590 per month
- Credit card minimum payment of £60; monthly debt calculated to £90.
- Car loan repayments of £185 per month
- Overdraft of £500. Interest and fees approx £30 per month. Monthly debt of £45
- Child maintenance payment of £239 per month
Income:
- Primary job salary £28,000 p.a. - £2,333 per month
- Small self-employed work of £200 per month
- Tax credits of £229 per month
Total debt: £1149
Total income: £2,762
DTI ratio: 41.60%
Example three:
Debts:
- A proposed mortgage of £630 per month
- Car loan repayments of £140 per month
- Unsecured personal loan of £58 per month
Income:
- Self employed income averaging £4,100 per month
Total debt: £828
Total income: £4,100
DTI ratio: 20.20%
An acceptable debt to income ratio
The lower your debt to income ratio, the less risk you present to a mortgage lender and a wider range of deals will be available to you when applying for credit.
At The Mortgage Hut we work with a large selection of specialised mortgage providers who are willing to look at your specific circ*mstances and tailor a mortgage product to suit your need. Lenders will use different criteria to make their final decision, of which DTI only represents one.
The following shows the general regard towards debit to income ratio across lenders:
- 100% or higher DTI - these prospective borrowers represent a huge risk and do not show an ability to make regular mortgage payments. Almost all lenders will reject an application in this instance.
- 75% to 99% DTI - borrowers who are very high risk. A select few specialist lenders will be willing to look at the application and make a positive decision where other factors are given more weight, such as credit score and a clean credit history or substantial deposit.
- 50% to 74% DTI - high risk borrowers. Some specialist lenders are willing to accept applications at this level, but terms are less favourable and larger deposits are required.
- 40% to 49% DTI - moderate risk borrowers. Specialist lenders will want to see good credit history and may ask for larger deposits.
- 30% to 39% DTI - acceptable risk. Most specialist lenders will offer a mortgage at this level at standard terms.
- 20% to 29% DTI - good borrower. Almost all lenders are happy to approve mortgage applications at this level.
- 0% to 19% DTI - very low risk borrower. All lenders will consider an application.
Debt to income ratio FAQs
Does my debt to income ratio affect my credit score?
No. DTI is a measure of affordability and has noimpact on the credit scoring system.
What is ‘front end ratio’?
Front end ratio refers to debt to income ratio that only accounts for your mortgage, and no other debts. The examples given in this article are all ‘back end ratio’ examples, taking into account other outgoings as well as the mortgage. Front end ratios are rarely used for afull mortgage applicationas they fail to provide a full picture of your finances.
Is my debt to income ratio accounted for when I obtain a decision in principle?
Most lenders do not check debt to income ratio at the agreement in principle stage of the application, though some do. Sometimes this does lead to a mortgage application being rejected despite a smooth DiP stage.
If you have concerns regarding your debt to income ratio, it is advisable to make those clear at the decision in principle stage yourself - being upfront can save a lot of trouble later in the process as different lenders can be approached that better meet your financial status.
How is debt to income ratio calculated in a joint application?
During ajoint mortgage application, debt to income is combined. Thus, both salaries and other income will be considered, alongside both partners’ debts.
Smooth mortgage applications with The Mortgage Hut
At The Mortgage Hut we work with a wide range of lenders to secure the best mortgage deals for you. If you are concerned regarding your debt to income ratio, why not call us for some reassurance? We can discuss your finances with you in detail and let you know the realistic chance of your mortgage application success. Our bad credit team are always on hand to look at your situation and have a huge amount of experience in securing successful mortgages for our clients.
Fill in our contact form or simply call us today with any questions, or to get started on your new mortgage!
