Another indicator, and one that is actively used by banks and lenders during the home loan assessment process, is the debt-to-income (DTI) ratio.

“Lenders take into consideration your income versus how much debt you have and will need to be confident that you’re in a comfortable financial position overall,” says Brodie Haupt, CEO and co-founder of digital lending and payments provider WLTH.

“They generally view borrowers with a smaller debt-to-income ratio as less risky and are more likely to approve their loan or offer discounted rates. Applicants with a high debt-to-income ratio are often subject to more stringent borrowing capacity restraints and may be required to have a larger deposit.”

Here’s an example. Say your household income is $150,000 and you’re looking to take out a $600,000 mortgage, but you also have a $15,000 car loan and $2000 worth of credit card debt. Your total debt ($617,000) would be divided by your income ($150,000) to give you a debt-to-income ratio of 4.1.

But how would that that 4.1 figure actually stack up? Regulator APRA has recently indicated to lenders that it considers a ratio higher than six to be more risky at present given that incomes are unlikely to keep up with housing costs in the short-term.

While each lender has slightly different thresholds when it comes to assessing a borrower’s debt-to-income ratio explains Rob Lees, the principal of Mortgage Choice Blaxland, Penrith and Glenmore Park, there is a rough point when borrowers will start to find it harder to get approved.

“Generally speaking, if your debt is less than seven times your income it will normally be okay,” he says.

“It’s once you start getting above a DTI of seven that it might become problematic. For example, if it’s over seven, they may not approve the loan if the LVR is over 80% and there’s mortgage insurance involved.”

Full Article: Money Magazine