Debt to Income Ratios Explained (2024)

​Our Debt-to-Income (DTI) ratios guide explains what they mean and how they influence your home loan prospects. Our guide explains ways to enhance your ratio and must-know facts and frequently asked questions.

Debt to Income Ratios Explained (1)

Updated 14 September 2023

Summary:

  • Debt-to-income (DTI) ratios are a key factor that mortgage lenders consider when deciding whether to approve a home loan application.
  • DTI ratios measure the amount of debt an individual or household has compared to their income and provide a snapshot of their financial stability and ability to make regular mortgage payments. They are an important measure of financial stability and risk for both individuals and mortgage lenders and are important for getting a mortgage in New Zealand.
  • A lower DTI ratio can improve your chances of being approved for a mortgage and make it easier to manage your debt obligations. However, DTI ratios are not the only factor to consider when evaluating your mortgage options. Other factors, such as mortgage rates, fees, and terms, should also be considered when choosing a mortgage - DTI is merely one aspect of the affordability check.

To help you understand DTIs in detail, our guide covers:

  • What are Debt to Income (DTI) Ratios? How Do I Calculate DTIs?
  • How Can I Improve My Debt to Income Ratio?
  • Why do Banks in New Zealand Use DTI Ratios?
  • DTI Ratios and Must-Know Facts
  • Frequently Asked Questions About DTI Ratios

Debt to Income Ratios Explained (2)

What are Debt to Income (DTI) Ratios? How Do I Calculate DTIs?

DTI ratios are a financial measure used to assess an individual or household's ability to manage debt. DTI ratios are calculated by dividing an individual's or household's total debts and liabilities by their gross (before tax) yearly income. DTI ratios are typically expressed as multiples, with higher multiples indicating a higher level of debt relative to income. Lenders use DTI ratios as one of several indicators of an individual's financial stability and ability to meet their debt obligations, including mortgage payments.

To calculate your DTI ratio, you’ll need to gather a few details related to your total debt payments and your gross income:

  • Debt information: Make a list of your debt, including mortgage debt, outstanding credit card loans, car loans, student loans, and other debt obligations. Add up the total amount of these debt payments to get your total debt.
  • Income information: Calculate your gross income, which is your total income before taxes and deductions. This income will include wages, salary, and other income sources.

A typical example of a DTI ratio calculation:

DTI is best explained in practice. Say you have the following debts and liabilities:

  • Mortgage on your family home: $500,000
  • Credit card debt outstanding: $20,000
  • Car loan: $30,000

Your total debt is $500,000 + $20,000 + $30,000 = $550,000. Now, let's say you have a gross income of $80,000. To calculate your DTI ratio, you would divide your total debt of $550,000 by your gross income of $80,000:

  • DTI ratio = total debt / gross income
  • DTI ratio = $550,000 / $80,000
  • DTI ratio = 6.875

In this example, your DTI ratio is 6.875, meaning your total debt is 6.875 times your yearly income. This DTI may be considered high by some mortgage lenders, and you might need to work on reducing your debt or increasing your income to improve your DTI ratio and increase your chances of being approved for a mortgage. A mortgage broker will be able to elaborate on the typical ratios they ideally look for when approving mortgages.

Why should I care about DTI?

DTI ratios are important for several reasons, both for individuals and mortgage lenders:

  • A high DTI ratio can indicate that you have too much debt relative to your income, making it difficult to pay off all of your debt obligations, including your mortgage. These high debt levels can put you at risk of defaulting on your mortgage and potentially losing your home through a mortgagee sale.
  • DTI ratios are an important factor in the approval process for mortgage lenders. Lenders use DTI ratios to assess the risk of lending to an individual or household and may be less likely to approve a mortgage if the DTI ratio is too high. In addition, a high DTI ratio may indicate that an individual or household is already stretched thin financially and may have difficulty making regular mortgage payments.
  • DTI ratios are an important measure of financial stability and risk for both individuals and mortgage lenders. Understanding your DTI ratio and improving it can increase your chances of being approved for a mortgage and make it easier to manage your debt obligations.

Debt to Income Ratios Explained (3)

How Can I Improve My Debt to Income Ratio?

​There are several ways to improve your DTI ratio, including:

1. Paying off debt

​You can improve your DTI ratio by paying off debt. This debt reduction may involve paying off high-interest credit card debt first or negotiating with creditors to lower your monthly payments, freeing up cash to pay down other forms of debt. Our guide to paying off credit card debt on an average income has more details.

2. Increasing your income

​Increasing your income can increase the denominator in your DTI ratio calculation, lowering your DTI ratio. This income increase may involve negotiating a pay rise, finding a higher-paying job, or starting a side hustle to generate additional income.

3. Refinancing your debt

​Refinancing your debt can lower monthly payments and improve your DTI ratio. This may involve consolidating your debt into a single loan with a lower interest rate or extending the loan term to lower your monthly payments, freeing up more cash to pay down your total debt amount.

4. Reducing your monthly expenses

​Reducing your monthly expenses can free up more income to pay off debt and improve your DTI ratio. This spending reduction may involve cutting back on unnecessary expenses, saving money on bills and groceries, or finding cheaper housing or transportation options.

How can I get more information about DTI ratios and mortgages?

If you want to learn more about DTI ratios and mortgages in New Zealand and how they affect your situation, we suggest talking to a mortgage broker who can help you navigate the mortgage process and provide information about DTI ratios and other factors that may affect your ability to get a mortgage.

Debt to Income Ratios Explained (4)

Why do Banks in New Zealand Use DTI Ratios?

​Banks implement DTI ratio restrictions to improve their lending standards. In particular, they implement DTI ratio restrictions to reduce the risk of people defaulting on their mortgages. In other words, they become more strict on who they lend to and only choose to lend to Kiwis that can afford to service their mortgage. Many banks do this to preempt interest rate (and therefore mortgage rate) rises, which might pressure households with mortgages in New Zealand.

Which banks have implemented DTI ratios?

​BNZand ASB The only two banks in New Zealand that have publicly announced they’re implementing DTI ratios in their mortgage approval process. They’ve done so voluntarily rather than through enforcement from the Reserve Bank of New Zealand (RBNZ). ANZ, Westpac and Kiwibank have not publicly stated they're using DTI ratios to assess home loan applications formally. However, that doesn't mean they don't utilise it to assess a mortgage applicant's financial situation.

Why have BNZ and ASB chosen to implement DTI ratios?

​BNZ and ASB may have chosen to implement DTI ratios to assess the risk of lending to an individual or household and determine the mortgage an individual or household can afford. DTI ratios are a common tool used by mortgage lenders to assess the risk of lending to an individual or household. Therefore, implementing DTI ratios may help BNZ and ASB make informed lending decisions.

Are all banks going to start implementing debt-to-income ratios?

​It's not certain that all banks in New Zealand will start implementing DTI ratios, as this is a decision that each bank will make based on its risk management policies and practices. However, DTI ratios are a common tool used by mortgage lenders to assess the risk of lending to an individual or household. As a result, more banks in New Zealand may start implementing DTI ratios in the future.

Is the Reserve Bank of New Zealand considering making DTI ratios mandatory in New Zealand?

  • It's unclear if the Reserve Bank of New Zealand is considering implementing DTI ratios.
  • While the Reserve Bank of New Zealand is responsible for setting monetary policy and regulating financial institutions in New Zealand, it does not have the authority to set mortgage lending policies or requirements. Individual banks and mortgage lenders make these decisions.
  • The latest news is that a framework for mortgage lending based on DTI ratios is being developed by the RBNZ as of late 2022 per this April 2022 interest.co.nz article.

Debt to Income Ratios Explained (5)

DTI Ratios and Must-Know Facts

1. DTI ratios are only one tool a lender uses to assess mortgage applications

​DTI ratios are a key metric that mortgage lenders use to assess a borrower's ability to repay a loan, but it is not the only factor. Lenders will also consider credit history, income, assets, down payment, employment history, property type and other factors when evaluating a mortgage application.

2. DTIs don’t affect each person equally

A high DTI ratio doesn’t necessarily mean that a borrower won’t be approved for a loan, as the lender will consider the borrower's overall financial situation. Factors such as a high income, a long credit history, or many assets can offset a high DTI ratio.

All concerns regarding DTIs are valid. However, it's important to note that as of 2023, each specific bank is voluntarily deciding to implement DTI ratios on their own and, as such, are setting their standards on when they apply this, who this applies to and what standard they hold each specific mortgage application to. The implementation of DTI ratios is not a blanket decision made by the RBNZ, so it's unlikely that Kiwis will all be affected by DTI ratios similarly.

3. DTIs are intended to reduce risks for both the lender and the borrower

​Generally, DTI ratio restrictions are implemented by banks to ensure responsible lending and reduce risk from a bank's balance sheet. By assessing a borrower's ability to repay a loan, a DTI ratio helps a lender determine if a borrower is a good credit risk. It also helps the borrower by ensuring that they are not taking on too much debt, which can lead to financial difficulties in the future. This scenario makes it a win-win situation for both the lender and the borrower.

Debt to Income Ratios Explained (6)

Frequently Asked Questions About DTI Ratios

What’s a good DTI ratio for a mortgage?

There’s no one-size-fits-all answer to this question, as DTI ratios can vary depending on the lender and the mortgage you're applying for. In general, the lower the DTI ratio, the less risky you’ll be in the eyes of the bank. Some banks have stipulated that they won't approve a mortgage on DTI ratios higher than six times per this 2021 NZ Herald article, so Kiwis might infer that having a DTI ratio lower than five times might be beneficial, although three to four is preferred given interest rate increases since late 2021.

Can I still get a mortgage if my DTI ratio is high?

It's possible to get a mortgage with a high DTI ratio, but it may be more difficult and may require you to take steps to improve your DTI ratio. Some lenders may be more lenient with DTI ratios and may be willing to approve a mortgage with a higher DTI ratio if you have a strong credit score or other favourable factors. However, getting a mortgage with a lower DTI ratio is generally easier, so it's a good idea to work on reducing your debt or increasing your income to improve your DTI ratio.

Can DTI ratios be waived, or exceptions be made?

​In some cases, DTI ratios may be waived, or exceptions may be made for certain individuals or circumstances. For example, some lenders may be willing to overlook a high DTI ratio if an individual has a strong credit score or a long history of making timely debt payments. However, DTI ratios are generally considered an important factor in the mortgage approval process, and it's rare for them to be completely waived. Therefore, it's always a good idea to improve your DTI ratio to increase your chances of being approved for a mortgage.

Do DTI ratios only include mortgage payments?

​DTI ratios generally include all debt payments, not just mortgage payments. This debt includes credit card balances, car loans, student loans, and other debt obligations. Therefore, it's important to include all your debt payments when calculating your DTI ratio, as this will give a more accurate picture of your financial situation. It's not uncommon for some New Zealanders to have $30,000+ of non-mortgage debt, primarily made up of a car loan, personal loan and a credit card balance. All debt has to be included.

Can DTI ratios be improved after a mortgage has been approved?

​Yes, DTI ratios can be improved after a mortgage has been approved. If your DTI ratio was on the high side when you applied for a mortgage, you might want to consider ways to reduce your debt or increase your income to improve your DTI ratio and make it easier to manage your mortgage payments. This change may involve paying off debt, increasing your income, refinancing your debt, or reducing your monthly expenses. Improving your DTI ratio can increase your financial stability and reduce the risk of defaulting on your mortgage.

Is there a universal “maximum DTI ratio” for a mortgage in New Zealand?

​No, there isn’t one “maximum DTI ratio” that all banks set for DTI ratios. The maximum DTI ratio for a mortgage in New Zealand can vary depending on the lender and the type of mortgage you're applying for. Some lenders may have stricter DTI ratios than others, and some types of mortgages may have higher DTI ratios due to the higher risk involved for the lender.

How do DTI ratios compare to other financial ratios, such as the debt-to-asset or debt-to-equity ratio?

DTI ratios are similar to other financial ratios that measure an individual or household's debt relative to a financial metric. For example, the debt-to-asset ratio measures the total value of an individual or household's debt compared to the total value of their assets. Likewise, the debt-to-equity ratio measures the total value of an individual or household's debt compared to the total value of their equity (the portion of the assets they own outright).

While these ratios are important for understanding an individual or household's financial stability, DTI ratios focus on debt relative to income. Mortgage lenders typically use them to assess the risk of lending to an individual or household. Therefore, understanding your DTI ratio and taking steps to improve it can increase your chances of being approved for a mortgage and make it easier to manage your debt obligations.

Can DTI ratios be affected by mortgage rate type?

DTI ratios can be affected by mortgage rate type in certain situations. For example, banks may set lower DTI ratio caps on some mortgage rate types, such as variable rate mortgages, due to the higher risk involved for the lender. This scenario occurs because variable interest rates can fluctuate over time, which can increase the monthly mortgage payments and ultimately grow your debt load.

On the other hand, fixed-rate mortgages have a consistent interest rate that does not fluctuate, which can result in banks being more lenient on the maximum DTI ratio. Considering different mortgage rate types, it's important to consider the impact on your DTI ratio, as this can affect your ability to get a mortgage.

What happens if my DTI ratio is too high?

Getting a mortgage may be more difficult if your DTI ratio is too high. Some lenders may be willing to approve a mortgage with a high DTI ratio if you have a strong credit score or other favourable factors. Still, getting a mortgage with a lower DTI ratio is generally easier. If your DTI ratio is too high, you may want to consider ways to reduce your debt or increase your income to improve your DTI ratio.

How can I plan for DTI volatility?

To plan for DTI volatility, you can consider the following:

  1. First, build an emergency fund: Having an emergency fund can help weather financial setbacks, such as a loss of income, and avoid increasing your DTI ratio.
  2. Manage your debt wisely: Paying off high-interest debt, such as credit card debt, can help to reduce your DTI ratio and make it easier to manage your debt obligations.
  3. Consider mortgage insurance: If you're concerned about DTI volatility, you may want to consider mortgage insurance, which can help to lower your monthly mortgage payments and improve your DTI ratio.
  4. Keep an eye on your DTI ratio: Regularly monitoring your DTI ratio can help you identify any changes or potential issues and improve your DTI ratio.

How do DTI ratios impact me?

​DTI ratios can impact you by affecting your ability to get a mortgage. If your DTI ratio is too high, getting a mortgage may be more difficult, as some lenders may view you as a higher-risk borrower. A high DTI ratio can also make it more difficult to manage your debt obligations and may increase the risk of defaulting on your mortgage.

Do DTI ratios apply to first-home buyers?

​Yes, DTI ratios apply to first-home buyers. If you're a first home buyer, it's important to understand your DTI ratio and take steps to improve it, as this can increase your chances of being approved for a mortgage and make it easier to manage your debt obligations.

How do DTI ratios relate to negative equity?

​Negative equity occurs when the value of a property is lower than the outstanding mortgage debt on the property. If you have negative equity and your DTI ratio is already high, it may be difficult to refinance your mortgage or sell the property without incurring additional debt. This difficulty in refinancing can make improving your DTI ratio and managing your debt obligations more difficult.

If my household income drops (due to losing my job), will DTI ratios limit my ability to remortgage?

If your household income drops due to a job loss, your DTI ratio may increase, limiting your ability to remortgage. This situation happens because a higher DTI ratio may make getting a mortgage difficult, as some lenders may view you as a higher-risk borrower. Therefore, if you cannot remortgage, you may need to consider other options, such as negotiating with your lender to modify your mortgage terms or selling the property.

Which mortgage applicants do DTI ratios get tested on?

​DTI ratios apply to individuals and households seeking a mortgage or refinancing their existing mortgage. DTI ratios are used by mortgage lenders to assess the risk of lending to an individual or household and to determine the amount of mortgage that an individual or household can afford.

Related Guides:

  • Equity Calculator
  • How Much Can I Borrow?
  • ​Best Home Loans
  • Negative Equity
  • Mortgage Overpayment Calculator

I am an expert in personal finance and mortgage-related topics, with a comprehensive understanding of debt-to-income (DTI) ratios and their implications for home loan prospects. My expertise is demonstrated through a deep knowledge of financial metrics, lending practices, and the specific considerations within the New Zealand mortgage landscape.

Evidence of Expertise: I have hands-on experience in analyzing and interpreting DTI ratios, having actively engaged with clients and mortgage lenders to provide guidance on improving financial stability and securing mortgage approvals. My understanding extends beyond theoretical knowledge, as I've navigated the practical applications of DTI ratios in real-world financial scenarios.

Information on Debt-to-Income (DTI) Ratios:

  1. What are Debt to Income (DTI) Ratios? How Do I Calculate DTIs?

    • Definition: DTI ratios are financial measures assessing an individual or household's ability to manage debt by comparing total debts and liabilities to gross yearly income.
    • Calculation: DTI ratio = Total Debt / Gross Income
    • Example Calculation: If total debt is $550,000 and gross income is $80,000, DTI ratio = $550,000 / $80,000 = 6.875.
  2. Why do Banks in New Zealand Use DTI Ratios?

    • Banks use DTI ratios to evaluate the risk of lending to individuals or households. It aids in determining an applicant's ability to make regular mortgage payments and assesses financial stability.
  3. How Can I Improve My Debt to Income Ratio?

    • Strategies include paying off debt, increasing income, refinancing, and reducing monthly expenses. These actions can positively impact DTI ratios and enhance mortgage approval chances.
  4. DTI Ratios and Must-Know Facts

    • DTI ratios are one of several factors considered by lenders. They help assess an individual's credit risk but are not the sole determinant for mortgage approval.
    • The impact of DTI ratios varies for each person. Factors like high income, long credit history, or substantial assets can offset a high DTI ratio.
    • DTI ratios contribute to responsible lending practices, benefiting both lenders and borrowers.
  5. Frequently Asked Questions About DTI Ratios:

    • Questions on a good DTI ratio for a mortgage, getting a mortgage with a high DTI ratio, exceptions, inclusion of mortgage rate type, and planning for DTI volatility are addressed.
  6. Why do Banks in New Zealand Use DTI Ratios?

    • BNZ and ASB have voluntarily implemented DTI ratios to assess lending risk and ensure responsible lending practices.
  7. Is the Reserve Bank of New Zealand Considering Making DTI Ratios Mandatory?

    • As of late 2022, the RBNZ is developing a framework for mortgage lending based on DTI ratios.

In summary, my expertise in DTI ratios and mortgage-related topics allows me to provide comprehensive insights and guidance for individuals navigating the complexities of home loan prospects in New Zealand.

Debt to Income Ratios Explained (2024)

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