If you're looking to apply for a mortgage or any other kind of credit, it's good to calculate your affordability and risk before you apply. Before agreeing to lend to you, lenders will look at certain criteria, including your debt-to-income ratio. This guide will look at the debt-to-income ratio, how it's calculated and how it will affect your mortgage application. You'll also find advice on what to do if you have a high debt-to-income ratio.

What Is a Debt-to-Income Ratio?

A debt-to-income ratio is the proportion of income you spend on paying off your existing debts, such as personal loans, credit cards and car finance. For instance, if your monthly income is £2,000 and £500 is used to pay off existing debts, your debt-to-income ratio is 25% or 500/2,000 multiplied by 100. Some lenders may work out your debt-to-income ratio on an annual basis.

For potential lenders, your debt-to-income ratio shows how much more debt you’re paying, given your current income situation.

Not all lenders use the debt-to-income ratio when assessing your application, some use alternative calculations to assess your debt and income in line with their own criteria when working out your affordability.

Nonetheless, a good rule of thumb is the lower your ratio, the less of a risk you pose to lenders and the more options you’ll have available. Some lenders may charge borrowers with a high debt-to-income ratio a higher interest rate to protect them against additional risk or decline your application entirely.

Is My Debt-to-Income Ratio the Same as My Credit Rating?

Your debt-to-income ratio and credit rating are 2 separate things. You may have a good credit score but a high debt-to-income ratio or a low credit score and a low debt-to-income ratio. Credit reference agencies like Experian, TransUnion and Equifax don't know how much you earn and any other income you receive. They simply look at your financial activities and payment history. Meanwhile, your debt-to-income ratio doesn't look at whether you pay your bills on time or any missed payments. Instead, it assesses how financially sound you are.

Does My Debt-to-Income Ratio Affect My Credit Score?

No, your debt-to-income ratio is a measure of affordability and doesn't impact your credit score. However, your debt could affect your credit score if you fail to repay your debt because you can't afford your repayments. This will show on your credit report, which records your financial history. Your credit report doesn't include your income, so if you have a high debt-to-income ratio, it won't have any bearing on your credit score. But don't forget that some lenders will still consider it.

How Do Lenders Use Debt-to-Income Ratio for Mortgage Calculations?

Whenever you apply for a mortgage, some lenders will calculate your debt-to-income ratio and look at it alongside your credit score and credit history. Other lenders may not express your debt and income as a ratio, but instead use alternative calculations to consider the impact of your debt and income on your mortgage affordability.

Understanding your debt and income helps lenders figure out the likelihood of you repaying the mortgage loan. While you cannot instantly improve your credit score, there are ways of improving it over time that will show that you’re managing your finances efficiently and are now a more responsible borrower. This means paying off as much of your existing debt as possible, paying all your bills on time each month, avoiding applying for any new credit and using your existing credit responsibly.

Will Lenders Consider My Debt-to-Income Ratio When Providing a Decision in Principle?

It's common for lenders to consider the debt-to-income ratio or an alternative calculation before they even reach the DIP (decision in principle) stage of the mortgage process. For a lot of lenders, they consider your debt and income as part of their affordability calculations when working out what you can borrow. Your broker will also consider this when they first look for a suitable mortgage deal for you. This can means that it’s unlikely your mortgage application will be declined at the full submission stage purely because of your debt-to-income ratio or a similar calculation.

If you're concerned about the impact of your debt-to-income ratio on the deals available to you, it's a good idea to raise these with your mortgage broker so they can save you time and hassle later on as they may need to direct you towards a different lender that better suits your financial circumstances.

How Is the Debt-to-Income Ratio Calculated for a Joint Application?

If you make a joint mortgage application, the lender will combine your debt-to-income ratio and situations as a whole. This means that both your salaries, including other income, will be taken into account, along with the debts of both you and your partner.

Can I Get a Mortgage if I Have a High Debt-to-Income Ratio?

You can still get a mortgage with a high debt-to-income ratio, but it may reduce the number of lenders available to you. Some lenders have a maximum debt-to-income ratio that they will consider – e.g. 50%.

This certainly isn’t the case for all lenders however, as debt-to-income ratio is just one of many tools lenders may use to assess affordability. Basically, just because your debt-to-income ratio is too high for some lenders, doesn’t mean another lender won’t consider you or will even assess your debt and income in the same way.

A high debt-to-income ratio or bad credit doesn’t have to stop you from getting a mortgage. An independent specialist mortgage broker like John Charcol can help you find the right lender if you have a low credit score, bad credit history, a high debt-to-income ratio or even if you’ve been refused elsewhere.

Can I Get a Remortgage with a High Debt-to-Income Ratio?

Yes, as with a mortgage, the criteria for remortgaging when you have a high debt-to-income ratio will depend on the lender. If your lender sees that you’ve taken out considerably more debt since you were originally approved for a mortgage, they may be reluctant to accept your application for a remortgage.

But that’s not to say that other lenders won’t be happy to consider your remortgage application as long as you meet the rest of their lending criteria.

In some situations, it may possible and advisable to remortgage to consolidate your debts. Ask your broker if you would like more information about this. It may not be possible to remortgage to consolidate your debts if you’ve already done this previously as lenders may view this as poor financial management.

Which Lenders Offer Mortgages to Borrowers with High Debt-to-Income Ratios?

Many lenders will consider applications from borrowers with a high debt-to-income ratios. Some of these lenders include Skipton Building Society, Nationwide and Natwest. They consider each application on its own merits and will want to assess your entire financial position before making their final decision.

Some specialist lenders, such as The Mortgage Lender, Precise Mortgages and Together, choose not to use debt-to-income ratios when considering applications which may make them a more suitable option if you have a lot of debt compared to your income. It's a good idea to speak to a specialist mortgage broker who can advise you on the right lender for your specific circumstances.

What Does a Lender Count as Debt When Calculating the Debt-to-Income Ratio?

What is defined as debt isn’t necessarily straightforward. When assessing debt-to-income, lenders will include your projected mortgage payment as debt, but your monthly rent payment isn't included if you still currently rent. Meanwhile, other debt, such as an overdraft, is considered debt but doesn't have a specific monthly payment.

When you're calculating your debt-to-income ratio, here's what is considered recurring monthly debt.

  • Credit card bills
  • Vehicle finance
  • Personal loans
  • Overdraft
  • Student loans
  • Regular maintenance payments
  • Others debts – debt management plan, Council Tax arrears, undocumented loan repayments to relatives or friends, etc.

Your regular utility bills, subscription services and mobile phone contracts, although often monthly debts, are not included in the debt aspect of your debt-to-income ratio.

How to Work Out Debt-to-Income Ratio

While there are debt-to-income ratio calculators online, you can work it out yourself fairly easily. To calculate your debt-to-income ratio, you must add up all your recurring monthly debt, including your credit cards, car finance, mortgage payments, car loans and student loans. Then add up your monthly income before tax and National Insurance deductions. Next, you simply divide your monthly debt payments by your monthly income and multiply the figure by 100 to convert it into a percentage. Here is an example of a monthly debt-to-income ratio.

What Is an Acceptable Debt-to-Income Ratio?

As long as your debt-to-income ratio is under 50%, you should find that many lenders will consider your application, unless there are issues on your credit report or other weaknesses in your mortgage application. If your debt-to-income ratio is over 50%, some lenders may have concerns about your ability to manage payments and may review your application more cautiously. Nonetheless, there are lenders that don’t consider debt-to-income ratios at all, instead employing alternative calculations – so remember there are options out there for all sorts of circumstances.

Think of your debt-to-income ratio as an indicator of your overall situation. Your debt-to-income ratio by itself won’t determine whether you can or can’t get a mortgage – it might just mean some lenders are available to you and some aren’t. Lenders don't look at your debt-to-income ratio as an isolated number. Many consider your debt and income as part of a wider financial picture.

How to Improve Your Debt-to-Income Ratio

Whether you're applying for a mortgage or just want to reduce your debt burden, improving your debt-to-income ratio – or more simply reducing the amount of debt you have - can have a significant and positive impact on how lenders view your application and who can consider you.

There are many effective ways you can lower your debt-to-income ratio, including the below.

Pay Off Outstanding Debts

If possible, pay off your debts before applying for a mortgage. For instance, you may consider aggressively reducing your credit card debts and spending.

Increase Your Income

Increasing your income each month isn't something everyone can do, but it will really help to lower your debt-to-income ratio. A higher income will boost your debt-to-income ratio if you’re due a promotion, pay rise or considering changing jobs in the future. If you know a salary increase is on the horizon, you may wish to consider delaying your mortgage application until your income has increased. Alternatively, you may consider getting a second job or doing extra freelance work.

Delay Borrowing

It's a good idea to consider delaying any other borrowing until your mortgage application is approved. If you're considering buying a new car using finance or taking out any other loans, it's worth holding off as it could affect your chances of being approved for your mortgage.

Summary: Debt-to-Income Ratio

Your debt-to-income ratio can play an important role in a mortgage lender's decision-making process, but it’s by no means the only important factor lenders consider as not all lenders even use this calculation.

Having a low debt-to-income ratio can be a good indicator of an overall healthy financial situation which means you’ll have access to more lenders and products, equally having a high debt-to-income ratio won’t necessarily stop you from securing a competitive deal with the right lender.

If you want to know more about how debts can impact your mortgage application or have been refused a mortgage, we recommend you speak to an independent, whole-of-market specialist broker like John Charcol. Our advisers have extensive knowledge of the mortgage market and can their expertise to find the right lender and mortgage product for your circumstances. We can also help you assemble your application to ensure you have the best chance of approval. Get in touch with us today on 0330 433 2927 to learn more about how we can help you.

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