DTI - the ratio of your debt to your income - and why it can change the home you're buying
APRA - the regulatory body for banks and lending - have mandated some controls for lenders to assess your lending capacity, and one that has potential for a bigger impact to your borrowing capacity - and therefore the type of home you can buy - is your measure of debt to your income known as DTI
Debt to income ratio is quite a different assessment to looking at your household income and expenses and has a huge impact for investors particularly or for new graduates carrying student loans, and even for teachers, nurses and other professionals who are marketed heavily for novated car leases.
Debt to income ratio (DTI) is a ratio of your acceptable income according to lender policy (so that is scaled back rent, only part of your overtime etc) versus the total debt that you hold inclusive of credit card limits, and personal or car loans as well as any mortgage and of course buy now, pay later facilities. Some lenders had removed HECS debts from this measure but APRA has recently mandated it's re-inclusion.
So essentially, your total limits of any credit facility divided by a reduced income in line with the lender policy, and in most instances this is capped at a factor of 6.
SIX times your income sounds like a load of money when you say it like that...but lets put this into perspective of, say, a recently graduated teacher or nurse who is on a salary of around $80,000 - and has a HECS debt of, say $20,000, a credit card and a car package.
$80,000 x 6 is a maximum of $480,000
less, say, Hecs of $20,000
a credit card with a $5,000 limit - nothing owing
and a lovely new car of $35,000 that is salary packaged...
that leaves a capacity of $420,000 and suffice to say this doesn't go very far towards a purchase.
Reality is the repayments on that are probably just right, but shows how limiting a factor DTI can be.
There are some lenders who do not fall under this restriction - have no DTI constraints - others who can consider a DTI of 7 or 8, and some who are open to mitigating the limits; by this I mean we can present a scenario where DTI would reduce and credit may accept the higher figure with this mitigant (an example, buying a home to live in with other investment debts - we have successfully presented that if the investments were sold the DTI would be under 6 and therefore if things got tight this is the clients plan).
We are super fortunate in our role to be able to sit above all of these policy nuances and point you towards the right lender or the right reduction in credit facilities to see you approved.
