What Is Debt to Income Ratio?
Your debt to income ratio (DTI) is a simple calculation that compares your total outstanding debt to your gross annual income. The formula is:
DTI = Total Debt / Gross Annual Income
Total debt includes every liability on your credit file: your proposed home loan amount, any existing home loans, car loans, personal loans, HECS-HELP balance, credit card limits and buy now pay later facilities. Gross annual income means your pre-tax income from all sources before any deductions.
For example, suppose you earn $100,000 per year before tax and you want to borrow $550,000 for a home loan. You also have a $20,000 car loan and a $10,000 credit card limit. Your total debt would be $580,000. Your DTI would be $580,000 divided by $100,000, which equals 5.8.
A DTI of 5.8 means you owe 5.8 times your annual income. Most Australian lenders would approve this, because it sits below the common cap of 6. If your total debt pushed above $600,000 in this example, your DTI would exceed 6 and many lenders would decline the application on that basis alone.
DTI is expressed as a multiple rather than a percentage. When someone says they have "a DTI of 6," it means their total debt is six times their gross annual income.
How Lenders Calculate Your DTI
While the DTI formula is straightforward, the detail matters. Lenders have specific rules about what counts as debt and what counts as income. Getting these wrong when you estimate your own DTI is the most common reason borrowers are surprised at approval.
What Counts as Debt
Every liability on your credit file and in your application is included in the total debt figure:
- Proposed home loan amount. The full loan you are applying for, including any capitalised fees such as LMI.
- Existing home loans. The outstanding balance on any current mortgages, including investment property loans.
- HECS-HELP debt. Your full outstanding HECS balance is counted, not just the annual repayment amount. See our HECS and home loans guide for the full repayment thresholds.
- Car loans and personal loans. The remaining balance on each loan.
- Credit card limits. Most lenders include the full credit limit, not the current balance. A credit card with a $20,000 limit and a zero balance still adds $20,000 to your total debt. Your credit score is a separate assessment but credit card history affects both.
- Buy now pay later (BNPL). Active BNPL accounts such as Afterpay or Zip are increasingly included. Some lenders count the facility limit, others count the outstanding balance.
- Other debts. Tax debts, ATO payment plans and any other financial obligations disclosed in your application.
What Counts as Income
Lenders use your gross (pre-tax) annual income from all verifiable sources. However, not all income is counted at 100%:
- Base salary. Counted at 100% with payslip or employment contract evidence.
- Regular overtime. Typically counted at 80% if you can demonstrate consistent overtime over the past 12 months through payslips.
- Bonuses and commissions. Usually shaded to 80%. Some lenders require a two year history. If your bonus is irregular, some lenders will exclude it entirely.
- Rental income. Shaded to 80% at most lenders. This accounts for vacancy, maintenance and management fees. Some lenders are more generous and use 90%.
- Government payments. Centrelink payments, Family Tax Benefit and similar are accepted by some lenders but not all. Those that accept them usually count the full amount.
- Self-employed income. Based on the last two years of tax returns or business financials. Lenders usually take an average or the lower of the two years.
Many borrowers estimate their DTI using their after-tax income. Lenders use gross (pre-tax) income, which gives a lower DTI number. Always calculate using your gross figure to get an accurate picture.
What DTI Do Lenders Accept?
DTI thresholds vary between lenders. APRA does not impose a hard industry cap, but it monitors the proportion of new lending above a DTI of 6 and expects regulated lenders to manage concentration risk at higher DTI levels.
| Lender Type | Typical DTI Cap | Notes |
|---|---|---|
| Big 4 Banks (CBA, ANZ, Westpac, NAB) | 6 | Hard cap for most borrowers. Exceptions are rare and require strong compensating factors. |
| Mid-tier Banks (Macquarie, ING, Bendigo) | 6 to 7 | Some allow DTI up to 7 for borrowers with strong serviceability and clean credit. |
| Non-bank Lenders | 7 to 8+ | Not regulated by APRA. More flexibility, but rates may be slightly higher. |
| Specialist / Private Lenders | No formal cap | Assess on a case by case basis. Significantly higher rates apply. |
Before 2021, DTI was tracked but not closely managed by most lenders. APRA's macroprudential tightening in late 2021, which also raised the serviceability buffer from 2.5% to 3%, brought DTI into sharper focus. Since then, the Big 4 have become much stricter about enforcing a DTI cap of 6.
The practical effect is that if your DTI exceeds 6, your options narrow considerably. You lose access to most of the major banks and need to look at mid-tier or non-bank lenders. These lenders can still offer competitive rates, but the pool is smaller. A mortgage broker is particularly valuable in this situation because they can quickly identify which lenders will accept your DTI level.
DTI vs Borrowing Power
DTI acts as a ceiling on how much you can borrow, regardless of whether you could afford the repayments. Here is a worked example that shows how DTI translates into a maximum borrowing figure.
Worked Example
Borrower profile:
- Gross annual income: $120,000
- Existing car loan balance: $20,000
- Credit card limit: $10,000 (zero balance, but the full limit counts)
- No other debts
Calculation at a DTI cap of 6:
Maximum total debt = $120,000 x 6 = $720,000
Existing debts = $20,000 (car loan) + $10,000 (credit card limit) = $30,000
Maximum new home loan = $720,000 minus $30,000 = $690,000
This borrower could apply for a home loan of up to $690,000 at a lender with a DTI cap of 6, assuming they also pass the serviceability assessment. For a broader view of how much you can borrow, see our borrowing power guide.
What Happens If You Close the Credit Card?
If the same borrower closed their $10,000 credit card before applying, the maximum new home loan would increase to $700,000. That is a $10,000 improvement from a single phone call to the card provider. This is why brokers often recommend closing unused credit facilities before lodging an application.
What Happens at a DTI Cap of 7?
At a non-bank lender with a DTI cap of 7, the same borrower (with the credit card still open) could borrow up to:
Maximum total debt = $120,000 x 7 = $840,000
Minus existing debts of $30,000 = $810,000
That is $120,000 more borrowing power simply from choosing a lender with a higher DTI threshold. The rate may be slightly higher at a non-bank lender, so the total cost over the loan term needs to be weighed against the extra capacity.
How to Improve Your DTI
DTI is a ratio, so you can improve it by reducing debt, increasing income, or both. Here are the most effective strategies, roughly ordered by impact.
1. Pay Down or Close Existing Debts
Every dollar of debt you eliminate improves your DTI directly. Prioritise paying off car loans, personal loans and BNPL balances before applying for a home loan. Even partial paydowns help, because they reduce your total debt figure.
2. Close Unused Credit Cards
Because lenders count the full credit limit rather than the balance, an unused credit card with a $15,000 limit is adding $15,000 to your debt total for no benefit. Cancel the card and your DTI drops immediately. If you have multiple cards, close all but one and reduce the limit on the remaining card to the minimum you actually need.
3. Cancel Buy Now Pay Later Accounts
BNPL facilities are increasingly scrutinised by lenders. Even if your account shows a zero balance, having an active BNPL facility can add to your assessed liabilities. Close any BNPL accounts you do not actively need at least 30 days before applying.
4. Pay Down HECS-HELP
Your full HECS balance is included in total debt for DTI purposes. If you are close to a DTI threshold, making a voluntary HECS repayment before applying can push your DTI below the cap. Voluntary repayments to HECS do not attract the 10% bonus that applied historically, but the DTI benefit can be worth it if it means qualifying for a loan you would otherwise miss.
5. Increase Your Assessable Income
If you have recently received a pay rise, make sure you have updated payslips reflecting the new salary before applying. If you earn overtime or bonuses, gather at least 12 months of payslip evidence so the lender can include that income in the calculation. Rental income from an investment property also counts (at 80% for most lenders).
6. Apply Jointly
A joint application with a spouse or partner combines both incomes, which can significantly lower your DTI. Two incomes of $80,000 give a combined gross income of $160,000. At a DTI of 6, that allows total debt of $960,000 compared to $480,000 for a single applicant on $80,000.
7. Restructure Your Debts
In some cases, consolidating multiple smaller debts into a single facility with a lower total limit can reduce your assessed debt. Speak to a broker about whether debt consolidation makes sense before your home loan application.
DTI vs Serviceability
DTI and serviceability are two separate tests, and you need to pass both to get approved for a home loan. Many borrowers confuse the two or assume they are the same thing. They are not.
What DTI Measures
DTI is a simple ratio of total debt to gross income. It does not consider your actual expenses, the interest rate on the loan, or the loan term. It is a blunt measure of leverage. A borrower with a DTI of 6 has six times their annual income in debt, regardless of whether that debt costs 2% or 8% in interest.
What Serviceability Measures
Serviceability is a detailed cash flow assessment. The lender takes your gross income, deducts tax, deducts your living expenses (using HEM benchmarks or your actual expenses, whichever is higher), deducts all existing debt repayments, and then checks whether the remaining income is enough to cover repayments on the proposed loan at the assessed rate (the actual rate plus a 3% buffer).
Serviceability accounts for the cost of your debt, not just the size of it. A borrower with a $600,000 loan at 5.50% has very different monthly repayments to a borrower with a $600,000 loan at 7.50%.
You Can Pass One and Fail the Other
It is entirely possible to have a DTI below 6 but fail serviceability. This happens when a borrower has high living expenses, multiple dependents, or a large existing mortgage with high repayments. The total debt may be within the DTI cap, but the monthly cash flow does not support the repayments at the assessed rate.
The reverse is also possible. A high income borrower with low expenses might comfortably afford repayments on a $900,000 loan, but if their gross income is $130,000 and the total debt including the new loan is $900,000, the DTI is 6.9 and a Big 4 bank would decline the application on DTI grounds despite the borrower clearly being able to afford it.
This is one of the key reasons borrowers with straightforward finances are sometimes surprised by a decline. DTI is a hard cap at most regulated lenders. Even if the numbers work from a cash flow perspective, a DTI above 6 will trigger a decline at many banks.
DTI is a hard cap on total leverage. Serviceability is a cash flow test. You need to clear both. If your DTI is close to 6, a broker can model which lenders give you the best outcome on both measures.
Check Your Borrowing Power
Your DTI, income, expenses and existing debts all affect how much you can borrow. Use Lendera's free comparison tool to see your options across 60+ lenders and find out where you stand.
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