What is the debt-to-income ratio?
Before approving new credit, lenders typically examine your credit report, credit score, and debt-to-income ratio (DTI).
While these factors demonstrate your capacity to repay borrowed money, your DTI ratio reveals whether you possess the resources to manage repayment.
Simply put, it represents the ratio of your debt to your income. When analysing your DTI ratio, lenders consider the proportion of your monthly earnings devoted to servicing your existing debt.
A low DTI ratio suggests that your income surpasses your debt, while a high DTI ratio implies that a larger portion of your salary is spent on debt payments.
Lenders generally prefer borrowers with low DTI ratios since they handle their monthly debt payments well. Therefore, banks and other financial institutions usually require a low DTI ratio before granting a loan to a prospective borrower.
What is an ideal debt-to-income ratio?
To qualify for a mortgage, a borrower should generally have a debt-to-income ratio below 43%, with no more than 28% of the debt being used to cover the cost of a mortgage or rent payment.
Ideally, lenders prefer a lower DTI ratio of less than 36%.
In Singapore, DTI is measured based on Total Debt Servicing Ratio (TDSR) or Mortgage Servicing Ratio (MSR), depending on the purchased property type.
How to calculate the debt-to-income ratio?
You can determine your DTI ratio by dividing your gross monthly income, which is your income before taxes and other deductions, by your total monthly payments. This includes credit card bills, rent or mortgage, car loans, and student loan payments.
How can you reduce your debt-to-income ratio?
If your ratio is high, take measures to lower it. Here are some ways to do so:
- Develop a plan to pay off your credit card balances.
- Increase the amount you pay towards your debts every month. This can help reduce your total debt more quickly.
- Request that creditors lower your interest rate. This saves the money that can be applied to debt repayment.
- Avoid accumulating more debt.
- Seek opportunities to increase your income.
It is also helpful to reassess your monthly DTI ratio to monitor your progress.
Recommended articles: Refinancing soon? How to prep for interest rate hikes & check your credit score, 7 facts about the Total Debt Servicing Ratio (TDSR) property buyers need to know.
