Understanding Debt-to-Income (DTI) Ratio

The Debt-to-Income (DTI) Ratio is an essential financial measure, especially when applying for a mortgage. It compares your total recurring monthly debt repayments to your gross monthly income, providing lenders with a key indicator of your financial stability. For borrowers, understanding your DTI ratio is crucial, as it plays a major role in determining mortgage eligibility and loan terms. A lower DTI ratio typically improves your chances of approval, as it indicates a healthier balance between your income and debt. However, if you have a high DTI or an adverse credit history, some lenders may still consider your application—especially specialist mortgage lenders that assess affordability more flexibly.

How Mortgage Lenders Use DTI in Affordability Assessments

When reviewing mortgage applications, lenders use the DTI ratio to evaluate how much debt a borrower can realistically manage alongside a mortgage. A lower DTI generally suggests financial stability and responsible debt management. However, if your DTI is high or you have a history of adverse credit, this doesn’t necessarily mean you won’t be approved. Some specialist lenders are willing to work with applicants who have higher debt levels, provided other aspects of their financial profile—such as a stable income or a larger deposit—demonstrate affordability.

Find Out Your Mortgage Eligibility

Looking to secure a mortgage, even with a high DTI or adverse credit? Our expert advisers specialise in finding solutions tailored to your financial circumstances. We assess your affordability and match you with lenders that fit your situation. Get started today or ask us a question to explore your mortgage options.

What Counts as Debt in Your DTI Calculation?

To get an accurate DTI ratio, it’s important to understand what qualifies as debt. Here’s what you need to include:

Mortgage & Housing Costs

If you’re applying for a new mortgage, use the expected monthly repayment amount— even if you’re currently renting or selling your home. Our mortgage repayment calculator can help estimate this figure.

Credit Card Payments

Lenders typically consider 1.5 times your minimum payment to better reflect your repayment behaviour and overall financial commitment. This accounts for the fact that paying only the minimum can extend the repayment period significantly, increasing your total debt over time.

Car Finance & Leasing

Include your monthly car loan or lease repayments, but exclude related costs like insurance, fuel, and road tax. Only the fixed repayment amount on your finance agreement should be used in your calculation.

Personal Loans

Any unsecured loans, whether from banks, credit unions, or other lenders, must be factored into your DTI ratio. These loans usually have fixed repayment amounts, making them an important consideration in affordability assessments.

Overdrafts

If you regularly rely on an overdraft, include a monthly estimate of interest, fees, and repayment amounts. While occasional overdraft use may not impact your mortgage application, persistent reliance on an overdraft could indicate financial strain.

Student Loans

Student loan repayments should be included in your DTI calculation, as they represent a long-term recurring debt. Unlike other loans, student loan repayments are often deducted automatically from your salary and are based on your income level. Even though these payments may be more flexible than standard loan repayments, they still impact affordability assessments. It’s important to provide accurate repayment details when applying for a mortgage.

Financial Support & Maintenance Payments

If you make child support, alimony, or other financial support payments, factor them into your monthly debt obligations. These payments can have a significant impact on your disposable income and, in turn, your mortgage affordability. If the amount varies each month, it’s best to calculate an average based on recent payments.

Debt Management Payments

If you’re repaying debts through a debt management plan, whether formal or informal, these payments need to be considered. Lenders view debt management plans as a sign of previous financial difficulties, but many specialist lenders will still consider mortgage applications if there’s evidence of improved financial stability.

Other Financial Obligations

This includes repayments to HMRC, benefit overpayments, or informal loans from family or friends. While these may not be traditional loans, they still impact your overall debt burden and should be included in your DTI ratio.

What Doesn’t Count as Debt?

Certain everyday expenses are not included in your DTI ratio, as they aren’t considered financial obligations by lenders. These include:

• Utility bills (electricity, gas, water)
• Mobile phone contracts & subscriptions (Netflix, Spotify, Amazon Prime)
• Internet & TV services
• Grocery expenses
• Public transport & fuel costs
• Health insurance & gym memberships
• Dining out & entertainment expenses

These expenses, while essential for daily living, are not included in the DTI ratio calculation because they are not fixed debt obligations. However, they still impact your overall financial health and should be considered when budgeting for a mortgage.

Your Gross Monthly Income

Understanding what constitutes your monthly income is crucial in accurately calculating your DTI ratio. This income is the total amount you earn each month before any deductions such as taxes or pension contributions.

What Qualifies as Income?

When determining your monthly income for the Debt-to-Income (DTI) ratio, it’s essential to consider all sources of income. This includes not only your primary salary but also any additional funds you regularly receive. Accurately accounting for all these sources ensures a comprehensive understanding of your financial capacity.

Benefits

Include all benefits you receive in your monthly income calculation. This encompasses child benefit, which provides financial support for children, and various tax credits that offer additional income support based on your circumstances. Disability benefits, if applicable, also contribute to your gross income. These benefits are integral to your financial landscape and play a significant role in your DTI ratio.

Earnings

For salaried employees, calculate your monthly income by dividing your annual salary by 12. If you’re paid weekly, multiply your weekly wage by 4.3. For daily earners, use a multiplier of 22. This calculation method ensures that your income is accurately represented, whether you receive it weekly, daily, or in another format.

Incoming Maintenance Payments

Regular child support received from an ex-partner should also be included in your income calculation. This form of financial support is a key component of your income and must be accounted for in your DTI ratio. It reflects your financial responsibilities and resources accurately.

Additional Earned Income

Any supplementary income, such as sales commissions, company bonuses, tips, or earnings from freelance or contract work, should be added to your total income. These additional earnings can significantly impact your overall financial situation and are crucial for a complete assessment of your income for DTI purposes.

Debt-to-Income (DTI) Ratio Examples

Here are a few illustrative scenarios to demonstrate how the DTI ratio is calculated in different financial situations:

Example One

• Debts: Proposed mortgage £800, Credit Card £160 (1.5x minimum), Car Lease £310, Overdraft £85.
• Income: Salary £46,000 p.a. (£3,833 monthly), Child Benefit £92.
• DTI Ratio: 33.5%.

Example Two

• Debts: Mortgage £600, Credit Card £95 (1.5x minimum), Car Loan £190, Overdraft £48, Child Maintenance £245.
• Income: Salary £29,000 p.a. (£2,416 monthly), Freelance Work £210, Tax Credits £235.
• DTI Ratio: 42.3%.

Example Three

• Debts: Mortgage £650, Car Loan £145, Personal Loan £60.
• Income: Self-employed income averaging £4,200 monthly.
• DTI Ratio: 20.7%.

How Much Debt is Acceptable for a Mortgage in the UK?

Lenders typically prefer a Debt-to-Income (DTI) ratio below 40-45%, but specialist lenders may accept higher ratios depending on individual circumstances. At YesCanDo Mortgage Specialists, we work with a variety of lenders to accommodate different financial situations, including those with adverse credit or high DTIs.