When applying for a home loan, it is important to understand your debt to income ratio to identify areas to improve before submitting your home loan application. It plays a key role in determining how affordable a loan will be and whether you meet the lender’s requirements and can manage monthly repayments. According to the DTI ratio in Australian standards, the average ratio to qualify for a loan is below 6.
Understanding your DTI ratio and making improvements to enhance it increases the chances of your home loan being approved while securing a loan that best fits your financial situation.
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What is Debt to Income?
Let’s look at what debt-to-income is and how it’s calculated. DTI is a term used to measure and compare the total debt you have and your gross income. This ratio shows all the debts you have remaining and helps lenders ensure that you can pay them off in the future while meeting the criteria to take out the loan.
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For example, if you earn around $80,000 annually before tax. You want to borrow $350,000 for a home loan, and you also have a credit card with $5,000 limit. Your total debt is $355,000, and to find out your total DTI ratio, you have to divide your total debt by your income:
355,000 ÷ $80,000 = 4.44
By this calculation, your DTI is 4.44, meaning your ratio is 4.44 times your income.
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The calculated ratio indicates that you are managing all your existing debts well and are less likely to struggle with repaying any future obligations. Many borrowers compare their loan amount to their income to see how close they are to the lender’s maximum ratio limit.
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How Does DTI Affect Home Loan Approval?
Debt to income plays a crucial role in home loan approval. If most of your income is already going towards your debt, lenders might hesitate to lend you more money. The rest of the approval criteria will not be an easy feat to crack. Keeping your ratio within a healthy range before applying for a home loan is important.
A lower ratio (usually under 4 or 5) means you are in a stronger position to manage debts and repay a home loan comfortably. Lenders see this as a sign of financial stability and money management. A higher ratio makes it difficult for you to acquire more loans. If your ratio is above what they require, it decreases your chances of getting your loan approved because there’s barely any guarantee for you. In some cases, they might lower the limit you can borrow, require a high deposit, or simply reject your application.
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Is a DTI of 7 Acceptable? What Australian Banks Really Allow in 2025!
Some Australian banks may allow a DTI of up to 7, but only in certain special cases. This usually happens when you have a high income and enough money even after excluding the expenses. This means you have a salvageable income and can make payments on time comfortably while covering all your living expenses, regardless of the debt obligations. Your application is more likely to get accepted by lenders.
Now, most of the lenders are becoming more and more strict about this rule. According to the Australian Prudential Regulation Authority (APRA) guidelines, ratios of 6 or above are riskier, and only a few banks are approving them than before. APRA monitors the risk closely and sets guidelines that influence how much risk leading banks are allowed to lend. As of now, there are very few new home loans that have a ratio over the average Australian standards.
Also, if you have a strong credit score and big deposits on your home loan, you can choose smaller lenders that can be more flexible than major banks. But they are more costly compared to the banks and have stricter rules.
Since September 2025, Student Loan HELP/ HECS has been officially excluded from the official DTI figures, but lenders will still look at them to determine if you can afford home loan repayments. Even though HECS might not be calculated in your DTI, lenders might still include it in your repayment obligations when checking how much you can actually borrow.
Read: When to Refinance a Home Loan?
What Income is Used to Calculate Debt to Income Ratio?
For the loan-to-income calculation, lenders use your income before tax. This includes your regular salary, self-employment profits, and other earnings such as overtime, commissions, bonuses, or rental income. But in some cases, lenders might consider investment income, dividends, or government allowances if they are verified and regular.
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Calculating your before-tax income helps you understand how much money you have available to pay your debts. How it’s calculated depends on the type of income:
- Salaried (PAYG) workers: For this type, the calculation should be your annual income before tax. But it does not include compulsory super contributions. This does not include compulsory super contributions, but regular allowances, like car or travel payments, might be counted.
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- Self-Employed: Use your net profit before tax, including some allowed adjustments. In this case, lenders check your average income from the past few years to make sure it’s stable.
- Other Incomes: You can also count incomes from casual work, contracts, overtime, bonuses, commissions or rental income if the income is regular and you can prove it.
The ratio includes all income sources before tax, regardless of where they come from, but lenders might limit how much they count if your income isn’t regular or guaranteed.
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Why is the DTI Ratio Important?
Debt to income ratio tells the bank whether you can afford to take new loans without putting too much stress on your finances. It helps lenders assess your overall financial health and determine how much you can actually borrow.
A low ratio shows that it’s less risky to lend you the money, and you can manage your money well. Having a healthy ratio can help you get better interest rates and more flexible loan terms on things like personal loans or home loans. Maintaining a strong ratio can improve your long-term financial stability, and it makes it easier to plan for future goals such as investments or property upgrades.
Using the Debt to Income Calculator.
Using a DTI ratio calculator helps you know and analyse how much more loan you can take. This gives you a quick idea of whether your finances fit what the Australian lenders look for. Let’s look at how the lending works and how you can calculate your debt to income ratio with the personal financial information you have.
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How to use it:
- Enter your income before tax. Add your annual salary and any regular income, such as bonuses, overtime, and rent.
- List all your debts: such as home loans, car or personal loans, credit card limits, buy now pay later accounts, and add student loans as well, since lenders still tend to consider these.