How To Improve Your Debt To Income Ratio

Dilleen Property Group 2022

Debt To Income Ratio (DTI) is a policy introduced to keep household debt in line with income. Many lenders have a threshold in place to ensure that borrowers can afford their repayments without putting themselves into financial hardship.

For example, if your income was $100,000 and the bank has a DTI ratio of 6 - the maximum you can lend from them would be $600,000. DTI threshold differs from each lender, some lenders do not have any DTI threshold. Most larger reputable banks have a DTI of 6 to 7. You may have to consider second or third-tier lenders for DTIs outside of this range to stretch your borrowing limits.

More Income, Less Liability

A way to improve your DTI ratio and increase borrowing capacity is by having more income on paper and less liability. This includes clearing off car loans, personal loans, credit cards, AfterPay, and limiting any extra expenses. An example of how to reduce your extra expenses is cancelling monthly subscriptions you're not using anymore. It's easy to forget about these small monthly/weekly payments but they can really add up if they're forgotten about. Another way to increase income is to get another job with a higher income, ask your employer for a pay increase, or start working another job, however, this may be more easily said than done.

Understanding How Lenders Perceive Your Income

For example, if someone is not using 100% of their overtime and has only used 50% of their overtime, lenders may calculate their income as less than what it really is. The difference of $20,000 in assessable income can heavily affect your DTI ratio, hence you should always aim to get more income on paper.

Lenders With Higher DTI

If you are urgent for a higher borrowing capacity, you may also consider using lenders with higher DTI. Second or third-tier lenders may have higher DTI’s of 8 to 9 or some may not have DTI thresholds at all. However, this may mean that they would charge a premium to counteract the risk of borrowers not being able to pay the repayments.

If you require assistance or have inquiries about your DTI ratio, you can contact our recommended broker Justin Picker for more information.

Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.