Debt to Income Ratios

Debt to Income Ratios ("DTI's") have been a part of financial analysis for a long time.

So whilst not new, we are hearing them as a language in mortgage lending.  First the NAB, CBA, and now the ANZ drawing DTI's out as a key plank in assessing mortgage credit. All of these lenders will be reviewing applications that have higher than DTI's ratios above prescribed thresholds. ANZ have now gone further, stating that if DTI is greater than 9 times annual income the application will not be accepted.

So what is it? By definition, DTI takes into account the total borrowings of an applicant, regardless of the term or nature of a credit facility.

Consider the following example:

       
Customer 1   Customer 2  
       
Home Loan  425,000 Home Loan  700,000
Investment Loan 600,000 Investment Loan 0
Credit Card Limit 15,000 Credit Card Limit 35,000
    Motor Vehicle Loan 55,000
    Personal Loan 35,000
       
Total Debt 1,040,000 Total Debt 825,000
       
Salary Income 175,000 Salary Income 175,000
Rental Income 35,000 Rental Income 0
       
Total Income 210,000 Total Income 175,000
       
Debt to Income Ratio 5.0 Debt to Income Ratio 4.7
       

 

DTI simply divides Total Debt by Total Gross Income.   So in the example above, Customer 1 has a higher DTI than Customer 2.  ($1,040,000 / $210,000 = 5.0).  Though, based on this limited information it is likely that Customer 1 has a superior monthly cash position.

So this measure ignores the cost or term of debt, and provides a more draconian measure of credit worthiness.  A reasonable secondary measure especially for customers for higher mortgage debt, including property investors.

CBA currently monitors applications with a DTI higher than 4.5, and applications with a DTI higher than 7 will be subject to credit approval.

We wait and see what impact this will have for credit assessment.

 

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