---
title: Debt to Income Ratios
description: DTI are a risk-based lending measure used in lending. Your DTI might affect your ability to get mortgage finance.
---

[MCP Financial Resources and News ](https://blog.mcpfinancial.com.au)

# [Debt to Income Ratios](https://blog.mcpfinancial.com.au/debt-income-ratios)

 Written by [David McCleery](https://blog.mcpfinancial.com.au/author/david-mccleery) | Aug 1, 2022 1:05:00 PM

**Debt to Income Ratios (DTI)** are a traditional measure used in financial analysis which have become more widespread in [mortgage lending](https://www.mcpfinancial.com.au/client-services/mortgage-finance) in recent years. 

First applied by the major banks and then soon after by other credit providers, DTI has become a key plank in assessing mortgage credit.  It is also a good starting point before diving into the detail of financial assessment.

A few years ago, lenders began to review applications that had DTI ratios above prescribed thresholds. Other lenders went further, stating that if DTI is greater than, say, 6 times annual income, the application would not be accepted.

[Commercial lending](https://www.mcpfinancial.com.au/client-services/commercial-finance) has also seen a growing focus on these types of credit measures.

## What is Debt to Income Ratio?

By definition, DTI takes into account the total borrowings of an applicant, regardless of the term or nature of a credit facility. Total borrowings will include credit card or consumer debt, vehicle or other asset debt, and other personal and property loans.

Let's consider the following example:

| **CUSTOMER A** |   | **CUSTOMER B** |   |
| --- | --- | --- | --- |
|   |   |   |   |
| 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** |
|   |   |   |   |

 

## How to calculate DTI

DTI simply divides Total Debt by Total Gross Income. 

So in the example above:

- Customer A has a total debt of $1,040,000 / total gross income $210,000 = 5.0.
- Customer B has a total debt of $825,000 / total gross income $175,000 = 4.7.

Therefore, Customer A has a higher DTI than Customer B. (Though, it could be that Customer A has a better monthly cash position.)

As a measure, DTI ignores the cost or term of debt and provides a more draconian measure of [creditworthiness](https://blog.mcpfinancial.com.au/five-cs-of-credit). It is a more reasonable secondary measure, especially for customers with higher mortgage debt, including property investors.

## Credit Implications of DTI

DTI are now applied as a risk-based measure in lending. For example, we are seeing an inverse relationship between the loan-to-value ratio (LVR) and the allowable DTI result. In other words, if you borrow above 70% of a property value, then expect the DTI to be capped at around 6 times.

This creates a further hurdle for [first-home buyers](https://landing.mcpfinancial.com.au/family-finance-guide) and other buyers with lower deposits.

Many banks currently monitor mortgage applications with a DTI higher than 4 or 5. Applications with a DTI higher than that will be subject to credit approval.

## Loan Pricing Implications

Where the DTI ratio is less than 5 times, Credit Providers will generally offer more competitive interest rates. Combined with a lower LVR, the interest rate offered might become even sharper. Talk to your MCP Finance Broker about how to prepare a property funding strategy for your scenario.

## Contact MCP 1300 510 816 or your Finance Partner [enquiry@mcpfinancial.com.au](mailto:enquiry@mcpfinancial.com.au)

Follow us on [LinkedIn](https://www.linkedin.com/company/16820) ***The team at MCP Financial Services has specialised expertise in structuring complex debt arrangements. We can assist with review and restructuring, refinancing and renegotiating.***

 

[View full post](https://blog.mcpfinancial.com.au/debt-income-ratios)

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