Debt-to-Income Ratio: What It Is and Why It Matters

If you’ve ever spoken to a mortgage broker or a loan officer, you’ve probably heard the term “debt‑to‑income ratio” or DTI. It’s a simple number that shows how much of your monthly earnings go toward debt payments. Lenders use it to decide if you can handle more borrowing. A high DTI can mean a higher interest rate or even a denied application, while a low DTI puts you in a better bargaining position.

Think of DTI as a traffic light for your finances. When the light is green – a low DTI – you can move forward with confidence. When it turns red – a high DTI – you might need to slow down, pay off some debt, or boost your income before taking on new credit.

How to Calculate Your DTI

Calculating DTI is easy. Add up all your recurring monthly debt payments – mortgage or rent, car loans, credit‑card minimums, student loans, and any other credit obligations. Then divide that total by your gross monthly income (the amount before tax). Multiply the result by 100 to get a percentage.

Example: You earn £3,500 a month before tax. Your monthly debts are £800 (mortgage), £150 (car loan), and £100 (credit‑card minimum). Total debt = £1,050. DTI = (1,050 ÷ 3,500) × 100 = 30%.

Most lenders like to see DTI below 36%, with 28% or less for mortgage‑related debt being ideal. Some specialist lenders may accept higher numbers, but you’ll usually pay more for the risk.

Ways to Lower Your DTI

Improving your DTI doesn’t require a magic trick. Start by tackling the biggest debt first. Paying down high‑interest credit‑card balances reduces the minimum payment you owe each month, which directly shrinks your DTI.

Second, consider refinancing a mortgage or personal loan if you can lock in a lower interest rate. A lower rate often means a smaller monthly payment, which improves your ratio.

Third, boost your income. This could be a side gig, a raise, or even renting out a spare room. An extra £200 a month in gross income drops the DTI percentage without altering your debt load.

Finally, avoid taking on new debt while you’re trying to improve your ratio. Each new loan adds to the denominator of the calculation and can quickly push you over lender thresholds.

Keeping an eye on your DTI is a habit that pays off whenever you apply for credit – whether it’s a mortgage, a car loan, or a personal loan for home improvements. Use the simple formula, track your numbers, and take small steps to lower the ratio. In time you’ll see better loan offers, lower rates, and a clearer path to your financial goals.