Do you take home a reasonably fat pay cheque every month? Have you been making all your monthly payments and debt repayments on time, always? Are you reasonably proud of your money management skills?

Well, that’s great! But that does not mean you will surely get approval on your home loan, thanks to the high debt-to-income ratio you may be servicing, unknowingly.


Many of us keep amassing those credit card points and fly miles, without realizing the affect on a future home loan application. Lenders judge borrowers for their recurring debts, despite stellar repayment histories, and a debt-to-income ratio of over 43 can successfully derail your home loan application with most lenders. Increase your chances of home loan approval by understanding this concept better.

What is debt-to-income ratio?

With household debt in Australia steadily increasing, debt-to-income ratio is an important figure that lenders take into account while deciding your loan serviceability. The ratio identifies how much of your monthly income is applied towards the payment of recurring debts such as credit card payment, personal debt, mortgage repayments or car loan.

For example, if your monthly income is $2,000 and you are spending $500 every month towards your repayments, your debt-to-income ratio is 25%.

How to calculate ratio?

You can easily calculate your debt-to-income ratio at home with this simple debt ratio formula. Firstly, calculate your total income from all sources. This will include your monthly salary, self-employed income (verifiable via tax returns), income from investments, social security payments and pension.

Next, calculate your ongoing monthly debts including credit card debt (minimum repayment amount), monthly repayments for car loan, student loan, home loan or any personal loan.

To calculate the ratio, simply divide monthly debt repayment amount by total monthly income and multiply by hundred to get your debt-to-income ratio expressed as a percentage.

How does debt-to-income ratio affect your home loan approval?

Having a debt-to-income ratio of over 40% means you are spending too much money to meet your debts and have hardly any disposable income left from month-to-month for your other expenses. This can affect your finances in multiple ways.

1. Having low disposable income means you may struggle to pay utility bills and any emergency expenditure that may arise.

2. Banks consider you at higher risk for potential default and may not approve your home loan at all.

3. While high debt-to-income ratio may not affect your credit score directly, too many rejected home loan or car loan applications will definitely show badly on your credit file.

Tips to reduce your debt-to-income ratio:

As explained above, high debt-to-income ratio can adversely affect your finances. Until and unless this figure is high because you are on a massive mission to cut down your debts, it is important to adopt one of the two (or both) below mentioned strategies to reduce your debt-to-income ratio.

A) Reduce debts – One way of reducing your debt-to-income ratio is simply reducing your debt. Here are some points to help you:

1. Make a budget to limit your spending by understanding where you are spending most and where you can cut down (Use this handy tool for creating an effective budget). Have these five essential elements in your house hold budget.

2. Minimize wasteful expenditure by cutting down on those shopping sprees and dine-outs, and apply the savings towards paying the debt off quickly. Instead, carry home cooked lunch and organize a garage sale for unused Christmas presents to save some extra money. Follow these savings habits to save more.

3. Instead of keeping several credit cards, opt for only one or two cards to bring down the minimum repayment amount, reducing the debt-to-income ratio significantly.

4. Get debt busting by listing all your debts, and start paying the ones with highest interest rates first.

5. Switch to cash to avoid buying beyond your means.

B) Increase income – The other way to reduce your debt-to-income ratio is increasing your income. While this may sound elusive, asking your boss for a salary hike is not a bad idea, after all.

1. Take up part time work or dabble in your hobbies constructively to make an extra buck – for example, taking cooking classes or painting or dance lessons in the neighbourhood or even helping the neighbours with their lawns can help you earn above your fixed salary.

2. Another idea is to park your savings in high interest rate savings accounts that you can find by simple online comparison.

3. It is also possible to ask your bank for a lowered credit card interest rate or refinance your existing home loan to one with a lower interest rate for minimizing the interest payments, and consequently, adding to your income.

Understanding your debt-to-income ratio can help improve your financial condition significantly. Apart from increasing your chances of home loan approval, it will free up your income that you can apply towards other life goals such as building your investment property portfolio.

At HashChing, we help you save more on your home loan by offering competitive home loan deals and lowest home loan rates through online mortgage comparison.  Compare mortgage rates on home loans for best home loan rates in the market. You could also use these handy home loan calculators to manage your finances better.

By Vidhu Bajaj


HashChing is helping Australians by providing access to the pre-negotiated home loan deals. Obligation free consultation with one of our partner brokers might save you time, hassle and money.