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Debt to income ratio mortgage

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Jan 8, 2023

Emma Lunn

Fact Checked By:
Emma Lunn - Finance Editor

Debt to income ratio for mortgages in the UK

It is important to understand the impact of your debt-to-income ratio (DTI ratio) on your mortgage affordability.

Mortgage lenders will often ask you how much debt you have relative to your income, known as debt-to-income or DTI. They’ll also try to determine if you can afford the monthly payments on the mortgage product that you are applying for.

This article will provide a detailed look at how UK mortgage lenders evaluate applicants’ debt-to-income ratios.

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How is the debt to income ratio calculated?

Your debt-to-income is the ratio of your gross monthly income to the amount you pay each month. Your gross monthly income is before taxes, monthly debt payments or any other deductions are taken. This provides lenders with a snapshot of your essential payments from your gross monthly income. They will use this to determine if you meet their affordability requirements.

To work out your DTI ratio, first add up your monthly recurring debt. Next, calculate your gross monthly income  – this can include any money you earn from freelance work, investments or child benefits.

Divide your monthly recurring bills by your monthly income and multiply this number by 100.

For example, let’s say your monthly income was £2,500 and your debts were at £1,000 per month. Your debt-to-income ratio is 40%.

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Calculate your debt-to-income ratio

What debts are counted?

You could have recurring monthly debt payments from student loan repayments, credit cards, loans, car finance, or rent payments. You could also have other types of adverse debts such as repayments under a debt management program. This could be cleared depending on when you registered.

The circumstances surrounding your debt will be considered by mortgage lenders. They will also consider the spread of your credit, such as the types and number of credit cards and loans you have.

The mortgage providers will be more open to loans to renovate or cover illness than if you borrowed money because were overspending on a day-to-day basis.

They are also more open to applicants who show they have paid off their debts or those whose debt has been decreasing consistently.

What is a good ratio of debt to income for a mortgage?

The general rule is that the lower your ratio, the more lenders will be inclined to lend to you. Lenders consider between 20-30% to be low risk and could offer better rates to borrowers.

Some lenders don’t have a maximum limit and will evaluate each case individually. Others may accept a ratio of less than 45%.

Brokers would recommend that you reduce your debt-to-income ratio if it is greater than 50%.

The table below provides an overview of the estimated number of lenders who will accept certain debt-to-income ratios. It is based on multiples of 10.

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What does my debt-to-income ratio have to do with my ability to afford a mortgage?

Your debt-to-income ratio is an important factor when calculating the size of your mortgage loan. The ratio of debt to income required to purchase a house may vary depending on the lender.

Mortgage lenders will expect that your monthly payments are covered by a percentage of your income. Most will also have a maximum ratio for debt to income.

A financial advisor can calculate your debt-to-income ratio and determine if you are financially sound enough to be eligible for a mortgage loan.

Send us an enquiry and we’ll match your enquiry with an expert to calculate your debt-to-income ratio and guide you on the next steps.

Does my debt-to-income ratio affect my credit score?

Your debt versus income ratio won’t affect your credit score. Because credit agencies don’t know how much you earn so they can’t calculate it,

Your debt-to-income ratio is an indicator of your credit health. If it is higher than the average, you are likely to have a lower credit score than someone with a lower ratio.

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Is it possible to get a mortgage if my debt-to-income ratio is high?

It might be possible. Every mortgage lender will have a different maximum debt-to-income ratio that they will consider when granting mortgage loans. Lenders will not lend less than 100% of the debt-to-income ratio.

While 50% is the most common limit, some lenders are more cautious. Only one lender is able to lend to applicants with debt-to-income ratios above 25% at the time of writing.

Many mortgage lenders will lend to applicants with higher levels of debt. These lenders have the highest debt-to-income ratios for home loans and will consider applicants with ratios above 100% – those who have greater debts than their income.

Some mortgage lenders prefer to let mortgage brokers evaluate a borrower’s affordability. They consider each case individually and factor in their debts.

In order to be sure you can meet the monthly payments:

Different benchmarks can be used by underwriters.

  • To consider other risk factors like loan-to-value, type of debt, and credit history when reviewing cases exceeding 50% debt-to-income ratios
  • Maximum monetary amount in debt consolidation (e.g. a lender might set the maximum amount of debt consolidation allowed at £30,000)
  • Accommodating a higher debt consolidation amount on the condition that the debts have accrued through property improvements/development
  • Consolidated debt does not exceed 20% of the mortgage balance
  • Instead of using income multipliers, determine affordability

A lender may be able to assist you with affordability concerns at the agreement-in-principle (AIP) stage in your mortgage application.

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Is it possible to refinance a mortgage if there is a high ratio of bad debt to income?

Yes. You can apply the same rules whether you are taking out a new mortgage or refinancing an old mortgage.

Refinancing with the same provider may be difficult if your debt-to-income ratio has increased significantly since you took out your mortgage. However, it all depends on how flexible the mortgage lender can be.

However, it is often possible to refinance with a new lender. This may be because you are a better match for their eligibility and affordability.

You may be subject to additional scrutiny if you have remortgaged to consolidate your debts. The lender may also apply a lower debt-to-income threshold.

Send us an enquiry and our advisors will help you to explore your options and search all the markets for the best deals.

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What is the acceptable ratio of debt to income for a secured loan

Secured loans, also known as homeowner loans, are secured against your property and function as a second mortgage.

These products have more flexibility in lending criteria than traditional mortgage providers, so it might be possible to get one with a higher ratio of debt to income.

If you have been declined for a refinance because of your high debt-to-income ratio, a secured loan could be a viable option for capital raising.

Talk to an expert about secured loans.

What about personal loans?

Personal loan lenders will be more attentive to your debt-to-income ratio. Borrowers with higher ratios are considered riskier and more likely to default than those with lower ratios.

Like mortgages, lenders can accept or reject what they consider risky depending on their risk appetite.

To speak with an advisor, get more information about personal loans and find the right lender for your needs, make an enquiry

What conditions must I meet in order to satisfy lenders with a lower ratio of income to debt?

Lenders that approve applicants with lower debt-to-income ratios may still have to meet certain conditions before they approve a mortgage request.

For example, some lenders might decline to lend a mortgage loan if the following conditions are met

  • Even if you pay off your unsecured debts in full or in part before completion, your maximum debt-to-income ratio is higher than theirs
  • Loans that are more than six months in duration may be available to you
  • A certain amount of credit repair is required (although they may consider your application with a lower debt-to-income ratio rating)
  • Your debts include a student loan

Talk to one of our experts and ask about any special circumstances that may apply.

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Before applying for a mortgage, how can I lower my debt-to-income ratio?

There are many ways to lower your debt-to-income ratio.

  • Do not take on more debt
  • High-interest consumer and credit card debts should be paid off as quickly as possible
  • Close unused credit card or loan accounts
  • Avoid making large purchases on credit before purchasing a home
  • Increase your income. Your debt-to-income ratio can be reduced by overtime, commissions, bonuses, and money earned from freelance work.

These are just a few of the many ways you can reduce your debt-to-income ratio before you apply for a mortgage. Talk to an expert broker for personalised advice about the best course of action.

Talk to a mortgage expert regarding debt-to-income ratios

Make an enquiry if you have any questions or want to talk to an expert.

Our expert brokers are whole-of-market and can help you find the best deal from many mortgage lenders so contact us today.

There are no fees, no obligations to invest and no negative marks on your credit rating.

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