Debt to Income Ratios (“DTI’s”) have been a part of financial analysis for a long time.
So whilst not new, we are hearing them as a language in mortgage lending. First the NAB, CBA, and now the ANZ drawing DTI’s out as a key plank in assessing mortgage credit. All of these lenders will be reviewing applications that have higher than DTI’s ratios above prescribed thresholds. ANZ have now gone further, stating that if DTI is greater than 9 times annual income the application will not be accepted.
So what is it? By definition, DTI takes into account the total borrowings of an applicant, regardless of the term or nature of a credit facility.
Consider the following example:
| Customer 1 | Customer 2 | ||
| Home Loan | 425,000 | Home Loan | 700,000 |
| Investment Loan | 600,000 | Investment Loan | 0 |
| Credit Card Limit | 15,000 | Credit Card Limit | 35,000 |
| Motor Vehicle Loan | 55,000 | ||
| Personal Loan | 35,000 | ||
| Total Debt | 1,040,000 | Total Debt | 825,000 |
| Salary Income | 175,000 | Salary Income | 175,000 |
| Rental Income | 35,000 | Rental Income | 0 |
| Total Income | 210,000 | Total Income | 175,000 |
| Debt to Income Ratio | 5.0 | Debt to Income Ratio | 4.7 |
DTI simply divides Total Debt by Total Gross Income. So in the example above, Customer 1 has a higher DTI than Customer 2. ($1,040,000 / $210,000 = 5.0). Though, based on this limited information it is likely that Customer 1 has a superior monthly cash position.
So this measure ignores the cost or term of debt, and provides a more draconian measure of credit worthiness. A reasonable secondary measure especially for customers for higher mortgage debt, including property investors.
Most banks will monitor applications with a DTI higher than 4.5, and applications with a DTI higher than 7 will be subject to credit approval.
We wait and see what impact this will have for credit assessment.