Debt-to-Income Ratio (DTI): Why Banks Use It
Updated 19 Sep 2025 · 4–6 min read
At a glance: Debt-to-Income ratio (DTI) compares your total debts to your annual income. Banks use it to decide how much you can safely borrow, usually capping DTI at 6–7× your income.
What is DTI?
Your DTI is calculated by dividing the total size of your loans by your gross (before-tax) annual income.
Formula: DTI = Total Debts ÷ Gross Annual Income
Example: If you earn $100,000 and borrow $500,000, your DTI is 5.0.
Why Do Banks Use DTI?
Banks want to make sure you don’t take on more debt than you can reasonably afford. Higher DTIs mean more risk if interest rates rise or your income drops. That’s why:
- DTI under 6.0: Usually acceptable by most lenders.
- DTI 6.0–7.0: Considered tight; some banks may decline.
- DTI above 7.0: Often considered too risky.
This is also influenced by APRA guidelines, which encourage lenders to be cautious with high DTI borrowers.
How Does DTI Affect Borrowing Power?
DTI directly limits how much you can borrow. For example:
- Household income: $150,000
- Lender max DTI: 6.0
- Maximum borrowing power: $900,000
Even if your expenses are low, if the loan would push you past the DTI cap, the bank is likely to decline.
DTI Calculator
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How to Lower Your DTI
- Pay down existing debts (credit cards, personal loans).
- Boost your income where possible.
- Borrow less — choose a smaller property or reduce loan size.
- Add a co-borrower to increase total household income.
Check Your Borrowing Power
Use our full Borrowing Power Calculator to see how DTI, income, expenses, and buffers combine to shape your maximum loan size.
General information only — not financial advice. Figures are approximate and based on general lending standards as at September 2025. Individual lenders have different DTI thresholds and credit policies. Seek professional advice before making borrowing decisions.