Calculate Your Debt to Income Ratio

What is a Debt to Income Ratio?

A debt to income ratio shows how much of your income is used up paying off your debt. The ratio is displayed as a percentage and the lower the percentage the better. 

A debt to income ratio of 10% means that you spend just 10% of your income paying off your debts and have the remaining 90% to spend as you wish. If you have a debt to income ratio of 80%, then this means that you only have 20% of your income freed up every month.


 

Who uses Debt to Income Ratios?

Debt to income ratios are normally used by mortgage companies or other financial lenders to assess whether you can afford to make repayments on a loan. A mortgage lender would be concerned that a person with a high debt to income ratio would be able to cope with another monthly payment. On the other hand, they would look favourably at people with low debt to income ratios.

Calculating Debt to Income Ratio

Calculating your own debt to income ratio is relatively simple and can give you a good indication of whether a mortgage company is likely to offer you a loan.

A debt to income ratio is your monthly debt divided by your monthly income with the result being multiplied by 100. 

Step 1: Calculate monthly debt. Include everything that is paid out each month such as rent, personal loan repayments, phone bills, insurance and so on. 

Step 2: Calculate your monthly income. Include guaranteed income so you use your salary or benefit payments but try to leave out bonuses or overtime if they are not guaranteed. 

Step 3: Once you have these two figures simply divide the debt by the income and multiply by 100.

An Example Calculation

David pays £500 a month on his rent, £50 a month on his phone and £100 on car and home insurance. Therefore, his monthly debt is £650. David's only source of income is from his job which pays him £1,200 a month. David's debt to income ratio is therefore calculated by dividing £650 by £1,200. This equals 0.5416. This is multiplied by 100 to give a ratio of 54.16%.

Lowering your Debt to Income Ratio

It can be hard to get finance with a high debt to income ratio so it is always worth trying to lower. In order to lower the ratio, you need to either lower your monthly debt or raise your monthly income.

If you have debts that need to be paid such as rent and insurance see if you can ask for more hours at work or find a part time job to boost your income. If you have debts which fluctuate depending on usage such as phone or fuel bills try to lower them. Ultimately, there is no easy option but lowering your debt to income ratio can really help you financially both now and in the future.

About The Author:
Amy Harris is a writer for FinancialTraining.co.uk – which helps British and international students find the right financial courses in London and the UK. Amy is an American expat herself, and enjoys helping people with their careers and financial planning.