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.

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.

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.

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.

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.

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.

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.

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.