How Do Mortgage Lenders Calculate Debt to Income Ratios? (2024)

The sort of relevant debts can include lots of different things:

• Loans and credit cards.
• Student loan repayments.
• Child support payments.
• Mortgage repayments or rent.
• Car financing.
• Debt Management Plan repayments.

Having debt doesn't necessarily mean you won't be approved for a mortgage - and you can even look at remortgaging as a way to consolidate other debts and streamline your outgoings.

The impact will depend on what sort of debt you have, how substantial the repayments are, and what your net disposable income looks like.

The lower the ratio, the less debt you have, and therefore the less risky your application. A ratio of around 20% to 30% is generally considered low risk and will be offered better interest rates.

There aren't always specific maximum debt to income ratios, although some lenders won't accept applicants at over 45%.

If you have a high debt to income ratio of over 50%, it's usually advisable to clear some of that debt before applying for a mortgage, as it will mean that the rates you are quoted will be less competitive.

As a rough idea, the below table shows a few examples of debt to income ratios, and what that might mean for your mortgage application:

Most UK lenders will rely on debt to income calculations to work out whether you can afford a mortgage - however, not all lenders will have the same policies in place, or treat the same ratio the same way.

In most cases, your monthly mortgage costs need to be within a certainpercentageof your income, and most lenders will cap their debt to income ratio and not lend to anybody above that level.

No, these are two different things. You might have a high debt to income ratio but a good credit score, a low credit score, and a low debt to income ratio.

Credit referencing bureaus don't know how much you earn and therefore look at your credit performance and payments history, recording any issues.

Debt to income ratios don't look at whether you have kept all of your repayments up within the due dates, but rather consider how financially sound you are.

Potentially, yes. Lenders all have different policies, and while many limit lending only to applicants with below a 50% ratio, others have much more flexibility.

In some cases, a specialist lender might be comfortable with a higher debt amount, depending on other circ*mstances that mitigate the risk.

Lots of lenders use their underwriters to decide on whether a loan is viable, looking at various factors such as:

• Whether there are any other high-risk factors to applicants with a debt to income ratio over 50%.
• If you are consolidating debts into the mortgage application, and if so, whether the lender has a maximum amount permissible.
• Whether the lender can consolidate a higher proportion of your other debts, depending on whether those debts are also related to property developments or renovations.
• Usually, the debt consolidation cannot make up more than 20% of the total borrowing applied for.
• Relying on other affordability calculation measures, such as using an income multiplier calculation to arrive at a maximum loan value.

Again, yes, you can - and the rules and policies depend on the lender.

If you have taken out substantially more debt since taking out your original mortgage, then the same lender might be reluctant to approve a remortgage application.

However, you might find that other lenders are happy to consider a remortgage application, provided you meet their lending criteria.

Should you have already remortgaged before to consolidate debts and are looking to do so again, a lender will likely apply more rigorous affordability checks than they would to an applicant with a lower debt to income ratio.

A secured loan isn't quite the same as a mortgage product, although both borrowing forms are secured against your home. A secured loan acts like a second mortgage.

Lenders can be more flexible with the terms, and therefore generally accept a higher debt to income ratio than they would be able to against a mortgage application.

In some cases, a secured loan is a viable alternative to a mortgage if you have higher levels of debt.

All lenders will consider debt to income ratios, and having a higher level of other obligations will always make an application riskier.

However, personal loans won't rely as heavily on this metric to determine whether you are likely to be approved - although again, this depends on the lender's policies.

There are several things you can do:

• Do not take out any more debt in the interim.
• Pay off as much as you can, prioritising higher interest debts such as store cards and credit cards.
• Close any accounts that you are not using.
• Delay any purchases on credit that are not essential.
• Look at ways to increase your income - such as working overtime, taking on freelance work, or a second job on Jooble.

This is a small number of options available, and there are lots of strategies to improve a credit score and lower your debt to income ratio - get in touch for more assistance.