A debt-to-income ratio (DTI) compares a borrower's total debt with gross annual income. Australian lenders use it alongside serviceability to assess a home loan.
At six times income or more, a loan falls into APRA's high-DTI category. Banks have limits on the share of new lending in that category, with exemptions for specified housing and bridging loans.
How DTI is Calculated in Australia
To calculate an Australian home loan DTI, divide total debt across the borrower's liabilities, including the proposed loan, by gross annual income before tax.
For a hypothetical borrower with $600,000 in total borrowing and $120,000 in gross annual income, $600,000 divided by $120,000 equals five. The borrower owes five times their annual income.
Use the lender's debt definitions when adding liabilities. APRA's ARS 223.0 definition counts credit limits, including cards, and excludes Higher Education Loan Program (HELP) debts. An unused card limit can therefore affect DTI.
A loan-to-income ratio counts the home loan alone. DTI also captures the borrower's other debts, so the two figures can differ.
The US Consumer Financial Protection Bureau's DTI formula divides monthly debt repayments by gross monthly income. Use the Australian total-debt formula for an Australian lending assessment.
Loan serviceability is a separate test of repayment capacity after expenses. APRA's mortgage serviceability buffer is three percentage points above the loan rate. A borrower can pass one test and fail the other.
The APRA Limit on High-DTI Lending
The Australian Prudential Regulation Authority (APRA) limits high-DTI lending by authorised deposit-taking institutions (ADIs), including banks and credit unions. Each ADI can fund up to 20% of new owner-occupied lending at a DTI of six or more. A separate 20% limit applies to new investor lending.
The limit applies to new loans funded. It does not force an existing borrower to reduce their loan because their DTI exceeds six.
APRA's implementation rules specify three exemptions.
- Finance for construction of new dwellings.
- Finance for purchase of newly built dwellings.
- Owner-occupier bridging finance while the borrower moves their principal home and still has an existing owner-occupied loan.
APRA expects exempt bridging arrangements to finish within 12 months of origination. Smaller ADIs can choose to include otherwise exempt loans in their measurement instead of reporting the exemptions separately.
ADIs classified as significant financial institutions use a quarterly measure. Smaller ADIs use a rolling four-quarter measure.
A high-DTI loan can still fit within an ADI's allowance. APRA's policy review retains the 20% limits and the three-percentage-point serviceability buffer.
How Lenders Weigh a High-DTI Application
A DTI of six or more invites closer assessment, but it does not trigger an automatic decline under APRA's limit. The lender must also accept the individual application under its credit policy.
A good ratio fits the lender's internal threshold and leaves the borrower able to meet repayments. Lenders set their own thresholds, which can sit below six. A lower DTI widens the potential panel, but it does not guarantee approval.
A strong credit history and genuine savings support the file. Stable employment gives the lender evidence of continuing income. Document lower actual living expenses accurately, while allowing for the lender's own expense assessment. These factors support assessment of the application without cancelling a DTI policy restriction.
Working the File When the Ratio is High
For a high-DTI file, reduce the debt where practical, select a lender whose policy accepts the ratio or consider a suitable non-bank lender.
- Clear short-term debts before assessment where the client can afford to do so. Reduce or close unused card limits and retain evidence of the change. Recalculate DTI after the liabilities change.
- Match the application to the lender's internal DTI cap and its capacity to accept high-DTI lending. Resolve policy questions before lodging.
- Consider non-bank lenders that are not ADIs. APRA's ADI limit does not bind them, although they still assess affordability and apply their own credit rules.
For a jointly held liability, distinguish the DTI treatment from a lender's common debt reducer serviceability policy. A servicing concession does not automatically reduce the debt counted in DTI.
Avoid repeatedly submitting a marginal file after declines without resolving the cause. Moneysmart warns that each loan application can add a credit enquiry. Diagnose the first rejection and address it before the next application.
Lender Differences and What to Monitor
Monitor how panel lenders treat investors near six times income, including internal caps and access to high-DTI lending allowances. APRA measures owner-occupied and investor lending separately, so acceptance in one category does not establish capacity in the other.
Read aggregator policy updates and lender newsletters for changes. Record whether a restriction comes from the lender's internal policy or its high-DTI allowance. That distinction helps you decide whether debt reduction or another lender addresses the problem.
Helping Clients Improve Their Position
Help the client build a budget that supports regular debt reduction while preserving money for repayments and living costs. Explain how reducing counted debt changes DTI, while reducing expenses helps the separate serviceability assessment.
Before lodging, calculate the exact DTI from verified income and the liabilities that will remain after settlement. Confirm the target lender's high-DTI policy in writing and retain its response with the file. If the ratio is six or more, identify a suitable fallback before submitting the application.
