If you're looking to buy a home in Australia and haven't heard of your debt-to-income ratio, you're going to want to make sure you read this.
Banks and other lending companies care deeply about it. You've probably spent an hour or two wondering what exactly is a Debt-To-Income (DTI) ratio and why you need to know yours so that you get approved for a mortgage loan. In fact, you've probably even Googled the question, "what is a debt-to-income ratio?" Well, never fear! We're here to help.
But What is DTI…
Your DTI ratio is your total debt against your gross household income. Total debt means things such as credit card bills, personal loans, student loans, car loans, and mortgages. While your gross household income is your total pay from all of your employers, including your spouse's, if you've got one.
That's it. That's the ratio. It's pretty straightforward.
So, why do banks care about it as much as they do?
Lenders Care Because...
The Australian Prudential Regulation Authority (APRA) released new data that shows 24.5 per cent of new mortgages have a DTI ratio over six, which deems to be risky for lenders today. In fact, DTI ratios have been gradually rising for a while now.
It is said that the increase in DTI has something to do with the price growth that’s been happening all over the country for 12 to 18 months. This includes the price of real estate, in which homes now stand at $920,100, which is a considerable jump from September, in which residential dwellings only stand at $876,100.
Therefore, many people are pushing beyond their limits to buy a property, which may be the reason for the upward trend in DTI ratios.
The good news is that the property market is starting to cool, which will also impact DTIs positively. Banks will still be on the lookout for these ratios, however.
The Safest Mortgage Amount is...
So, if you're wondering what the amount you can safely borrow in this environment is, the answer is that it depends on your income. The general rule of thumb is that your gross household income should be at least 3.5 times your total debt.
The best thing to do? Talk to your lender about what you can do to keep your DTI in check. And if you've got a big mortgage and are thinking about buying another property, you may be better off waiting a while before you do.
Not everyone will have a DTI ratio over six, but many will. If you're looking to buy a new property and don't have a DTI over six, it's not necessarily a big deal. Some people are just lucky to have spent less.
But for those who find themselves in a situation with a DTI over six and are looking to buy in the near future, here are a few ways you can lower your ratio:
- Cut back your spending
- Keep an eye out for a better job
- Pay off your car loan
You can also limit your DTI by paying off your credit card and personal loan debt before applying for a mortgage loan. Also, if you can wait until your unsecured debts are fully paid off, you'll also be better off.
You're Halfway There...
Your DTI ratio is a safe way of seeing whether or not you can afford a loan or not. So, the next time you ask the question, "what is my Debt-To-Income ratio?" you'll know the answer. And knowing is half the battle.
Are you looking for the best home loans in Sydney? Wealthy You can help. We are an Australian Mortgage Company that offers a variety of mortgage solutions to meet your specific financial needs. Get in touch with us.
