What is the debt-to-income ratio?
This calculates how much of your monthly income goes toward paying off debts. The higher your debt-to-income ratio, the more of your monthly income you're solely devoting to paying back loans.
Where have you heard about the debt-to-income ratio?
Debt to income is important to manage because not only does it tell you if you’re likely to get into financial difficulties, it’s a factor considered by lenders when they evaluate your creditworthiness. So if you’re seeking a mortgage or other loan, your debt-to-income ratio will be taken into account, along with your credit score.
What you need to know about the debt-to-income ratio.
The ratio is calculated as monthly debts owed divided by monthly income, and is expressed as a percentage.
For example, you earn £2,000 a month. Your mortgage is £550, car loan £170 and other debts amount to £200. The debt-to-income ratio would be 0.46, or 46%. Something below 36% is preferable.
If the ratio is too high, a lender might conclude that you won’t be able to pay back your debts very easily so will be less inclined to grant approval for another loan.
Find out more about the debt-to-income ratio.
Read our definition of credit score to discover how else lenders assess creditworthiness.