Understanding debt-to-income-ratio

If you’re looking for a home loan, it’s a good idea to work out what your debt-to-income ratio (DTI) is and what it might mean for your home loan application.

It can help you learn whether you're carrying too much debt in the eyes of lenders and give you a chance to do something about it before you apply.

What is a debt-to-income ratio?

Let’s start at the beginning. As you may have guessed, your debt-to-income ratio measures the amount of debt you have compared to your income. It’s both a key measure that lenders use to determine whether you’re carrying too much debt to manage home loan repayments and a marker of responsible lending practices as enforced by the banking regulator.

Many lenders will consider your debt-to-income ratio alongside other measures such as your credit score, living expenses, and the loan-to-value ratio (LVR) of the property you’re looking to buy when assessing your application.

How to calculate your debt-to-income ratio

To calculate your debt-to-income ratio, add your total household credit or debt balances and divide it by your gross annual income (before tax and other deductions are taken out).

As an example, if you take out a $750,000 home loan and you have no other household debt on a gross income of $130,000, your debt-to-income ratio would be 5.77.

Another way of putting it is that your debt is 5.77 times your income.

What debts are included in the debt-to-income ratio calculation?

The debt-to-income metric covers your total household debt. That will include:

• Credit card limits (even if they are paid in full each month)

• Car or personal loans

• Any existing mortgages

• Portfolio loans

• HECS/HELP loans (see more on this below)

• Tax debt

• Buy now, pay later debts

• Child support or alimony payments

• Lease or hire purchases

Are HECS/HELP debts included in the debt-to-income ratio?

In February 2025, the federal government announced what it called “commonsense changes” to how banks and lenders should regard education loans when assessing home loan applications.

The government asked regulators to allow lenders not to count HECS/HELP debts in their debt-to-income calculations, arguing student loans were not like other debts in that repayments are linked to income and are paused during periods of unemployment.

However, after a review of its lending regulations, banking regulator APRA said it would not be relaxing its borrowing guidelines and expected banks to continue counting student loans as debt.

But it said it would update its lending standards, allowing some banks to disregard the cost for borrowers who “expected to pay off their HELP debt in the near term”.

Meanwhile, regulator of the non-bank sector, ASIC, said it would move to implement the requested changes after “targeted consultation”.

What income is included in the debt-to-income ratio calculation?

For PAYG earners:

• gross income (that is, before tax)

• Any overtime or bonus payments

• Commissions

• Rental income from any investment properties

• Dividends from shares

• Any other incomes

For the self-employed:

• Net profit before tax

• Rental income from any investment properties

• Dividends from shares

• Any other incomes

What is a good debt-to-income ratio?

In simple terms, the lower the debt-to-income ratio, the better. That’s because the ratio evaluates how many times greater your debt is compared to your income.

The higher your debt-to-income ratio, the less likely lenders will be to approve a home loan.

Here’s a general indication of DTI bands:

• Low: 3 or below
  Considered excellent

• Medium: 4 - 6
  Considered good

• High: 7 - 9 or higher
  Considered risky

Every lender has its own cut-offs and policies as to what it considers ‘too risky’. Depending on the lender, some borrowers with higher debt-to-income ratios may be subject to stricter lending conditions or only eligible for smaller loans.

Other lenders, particularly non-bank lenders, may have their own methods to assess whether a customer will be able to make repayments and are not always required to impose rigid debt-to-income levels.

How can I improve my debt-to-income ratio?

If your debt-to-income ratio is on the high side, there are two basic ways you can lower it:

• Decrease your debt

• Increase your income

Lowering your debt is always a good place to start if you’re in the market for a home loan anyway. Here are some ways to do it:

• Pay off your credit card

• Lower your credit card limit, or

• Cancel your credit card if you can get by without it

• Clear any buy now, pay later debt

• Consider a debt consolidation loan

• Pay down any student debt

• Pay down or pay out any other loans

For practical options to increase your income, consider:

• Asking for a pay increase

• Taking on extra work or a side-gig

• Looking for a higher-paying job
  (keep in mind though, lenders generally like to see you’ve been with an employer, or at least in an industry, for a period of at least six months)