What is Debt:Income and why does it matter?
Posted on 9th August 2023 at 11:15
The simple definition of Debt:Income (Or debt to income ratio) is the level of unsecured debt you have in relation to your annual income. This can be your joint level of debt and personal income and individually. For example if you earn £100,000 per year and have a total of £50,000 in credit card debt and personal loans then your Debt:Income is 50%.
How do lenders use it and why are they bothered by it? Gone are the days when lenders would take your annual income and multiply it by 5x and that would be the amount you could borrow. Since the financial crisis of 2008, the assessments lenders use now are much more complex to ensure that the people they can lend to truly can repay this mortgage in the event their circumstances change or their finances change.
Most high street lenders cap their Debt:Income to 50% to protect themselves if interest rates increase. When interest rates increase its not just your mortgage payments that increase, its your credit card payemnts and potentially personal loan payments that also increase. Lenders are aware of this and do not want to see that you are over exposed in this regard because their priority is that you can repay the mortgage, they have given you. They do not like it if you have other commitments that may force you to have to choose between paying your mortgage or your other commitments.
Debt usage can be a sign to lenders of poor money management or a tendency to spend more than you earn. In the eyes of the lenders if you cannot manage smaller amounts of credit like credit cards or loans, how would you manage a much larger commitment like a mortgage?
Our advice is when you are approaching the end of your current deal or are planning to buy your next home to look at your credit file and check your level of indebtedness.
Can you pay down your credit card balances to bring your debt:income below 50%. In doing this you will meet the criteria of more lenders, and this will give you the pick of all of the options to choose the cheapest and best option for you. Best advice is to look at this 12 months before your deal is due to end to give yourself plenty of time to pay down your debts to get yourself under the 50% limit some high street lenders impose.
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