Buying A Home: Do You Know Your Debt-To-Income Ratio?

09 Oct Buying A Home: Do You Know Your Debt-To-Income Ratio?

Maintaining debt at a manageable level is important when applying for home loans NZ, as debt-to-income ratio (DTI) rules on mortgage lending could make it harder for first home buyers and existing homeowners to secure finance. The DTI ratio is used by some lenders to determine financial stability, as it can be an effective tool for ensuring home loan affordability. Read on to find out what debt-to-income ratio is, how to calculate it, along with valuable tips to improve your debt-to-income ratio to reach your home ownership dreams.

What is debt-to-income ratio?

Debt-to-income (DTI) ratio is a financial indicator that measures the proportion of your debt payments compared to your gross income. It’s an important factor that some lenders use when evaluating home loan applications, as it helps them understand your ability to handle new debt responsibly and whether you can comfortably meet your mortgage repayments alongside your existing financial obligations.

Some lenders already use a debt-to-income ratio calculation in their own lending requirements and will typically factor in debt such as credit cards, Afterpay, personal loans, car loans, student loans, and mortgages. Depending on the DTI ratio limit set by the lender, borrowers may be restricted in how much they can borrow if their DTI ratio is considered too high, while a high debt-to-income ratio in combination with bad credit could disqualify borrowers from getting a mortgage.

How to calculate debt-to-income ratio?

To calculate your DTI ratio accurately, follow these simple steps:

Step 1: Add up all your debts. Include credit card debts, personal loans, and any other outstanding debts.

Step 2: Calculate your gross annual income. Include all sources of income, such as your salary, bonuses, rental income, or any other regular earnings.

Step 3: Divide the total amount of your debts by your gross annual income.

For example:

Total Debt = $500k (mortgage) + $20k (credit card) + $30k (personal loan) = $550k

Gross Annual Income = $80k

DTI Ratio = ($550k debt / $80k income) = 6.875

Calculating your DTI ratio accurately and understanding what it means can be a bit tricky, get in touch with a Mortgage Adviser to find out more.

How to improve debt-to-income ratio?

Maintaining a healthy DTI ratio is important when it comes to applying for home loans NZ. Here are some strategies to help first home buyers and existing homeowners improve their DTI ratio:

  • Reduce outstanding debts: There are multiple repayment strategies that could be used for lowering debts. For example, the snowball method is an effective repayment strategy to help you stay motivated by paying off smaller debts sooner and steadily progressing towards becoming debt-free.
  • Increase your income: Find opportunities to boost your income, such as a promotion, taking on additional work, or exploring side gigs or freelancing options.
  • Avoid taking on new debt: When planning to buy a home, it’s best to delay major purchases and avoid taking on additional debt until after you secure your mortgage.
  • Refinance or consolidate debt: Consider refinancing high-interest loans or consolidating debts to lower your monthly repayments and streamline your financial commitments.
  • Budget wisely: Create a detailed budget that allocates funds for debt repayment and savings. Stick to this budget to manage your finances efficiently.
  • However, avoid joint mortgage applications if your partner or family member has too much debts, as their debts will be included in the overall debt level for calculating the DTI ratio.
  • Get professional advice: Consult with an experienced Mortgage Adviser, such as those at Max Mortgages, who can provide tailored financial strategies and help you understand your debt-to-income ratio.

Managing debt-to-income ratio

Understanding and managing your debt-to-income (DTI) ratio is essential when it comes to buying a home in New Zealand, as lenders may consider this ratio when assessing your financial capacity and determining your eligibility for a mortgage. By taking proactive steps to improve your DTI ratio, you can improve your chances of mortgage success and set yourself up for a rewarding home ownership journey.

For more home loans NZ or first home buyer advice, get in touch with the team at Max Mortgages.

Contact a Mortgage Adviser


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