Glossary
Debt-to-Income (DTI)
How much of your income goes to debt payments
Debt-to-income compares annual loan repayments against annual income. It is the test of whether a borrower can actually service the debt.
Where loan-to-value asks what the collateral is worth, this ratio asks whether you can repay. It is why an expensive property does not produce a loan when income is insufficient.
With a 40% limit and an income of 50,000, annual principal and interest cannot exceed 20,000 — and the borrowable amount is worked backwards from there.
Longer terms lower the annual repayment and raise the limit, which is why people extend the term to qualify. The total interest rises considerably in exchange, and both belong in the decision.
Existing debts count too. Personal loans and car finance reduce the room available, so clearing other borrowing first helps when planning a mortgage. How income is evidenced can also change the limit, since the range of income recognised often differs between employees and the self-employed.