How much debt do you have compared to your income and why does it matter to lenders?

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According to recent data from the lending watchdog, nearly one out of every four new mortgages is dangerous. What makes them dangerous? It has to do with your debt-to-income ratio, which we'll go over in detail in this week's post.

The debt-to-income (DTI) ratio may appear difficult, but it’s actually rather simple to calculate.

In simple terms, your DTI is a ratio that lenders use to evaluate your total debt to your gross family income.

Total debt divided by gross income equals debt-to-income ratio.

So, if you’re looking for a $700,000 home loan (and have no other debt), and your gross family income is $160,000, your DTI is 4.375, which is a ratio that most lenders would consider acceptable.

So, why is your DTI important to lenders?

According to the Australian Prudential Regulation Authority (APRA), 24.4 percent of new mortgages have a DTI ratio of 6 or higher in the December quarter.

APRA (Australia’s banking watchdog) considers these loans hazardous at a 6+ ratio.

They also want to see the percentage of these loans approved by lenders start to decline.

That’s because they’ve been slowly increasing for quite some time.

For example, new mortgages with a DTI of 6 or above were at 23.8 percent in the September 2021 quarter, but just 17.3 percent in the December 2020 quarter.

This is a $44,000 increase over the September quarter ($876,100) and a $176,000 increase over the December 2020 quarter ($744,000).

As a result of the rapid rise in property prices and people pushing themselves to their limitations to get into the market, high DTI percentages are under increasing strain.

The good news is that when the housing market cools, the rate of rise of riskier DTIs should slow as well, as APRA mentioned above.

So, how much can you borrow without risking your credit?

There’s a fine line to be drawn between maximizing your investment prospects and pushing yourself past your comfort zone.

Especially since RBA Governor Dr. Philip Lowe cautioned Australians this week that higher interest rates are on the way.

That’s where we can help.

It’s critical to stress-test your borrowing capacity not only in the current financial climate, but also in light of any forthcoming headwinds that are expected to affect borrowers, such as interest rate hikes and tightened lending criteria.

But wait, there’s more! Each person’s financial condition is unique. Some lenders will consider your unique circumstances and approve a loan application with a DTI of more than 6.

So, if you’re interested in learning more about your borrowing capacity and options, contact us immediately. We’d be delighted to sit down with you and assist you in developing a strategy.

Especially since RBA Governor Dr. Philip Lowe cautioned Australians this week that higher interest rates are on the way.

That’s where we can help.

It’s critical to stress-test your borrowing capacity not only in the current financial climate, but also in light of any forthcoming headwinds that are expected to affect borrowers, such as interest rate hikes and tightened lending criteria.

But wait, there’s more! Each person’s financial condition is unique. Some lenders will consider your unique circumstances and approve a loan application with a DTI of more than 6.

So, if you’re interested in learning more about your borrowing capacity and options, contact us immediately. We’d be delighted to sit down with you and assist you in developing a strategy.

To learn more, contact Premium Finance Group Australia at (07) 4720 8888 or email us at finance@pfga.com.au

Disclaimer: The content of this article is general and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your situation and may not be relevant to circumstances. Before taking any action, consider your particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent.

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