08 Oct How to Calculate Your Debt-to-Income Ratio

Posted at 14:27h in Latest News by

Have you ever wondered how to calculate your debt-to-income ratio? You can calculate your DTI (debt-to-income) ratio using the formula DTI ratio = total monthly debt ÷ total gross monthly income x 100.

What’s a DTI Ratio?

Your debt-to-income ratio is a metric lenders use to assess your creditworthiness. Typically, the higher your DTI, the lower your chances of qualifying for credit. It compares your monthly debt repayments to your overall monthly income.

You can calculate it by dividing your total recurring monthly debt by gross monthly income (total income from all sources, including returns, discounts, and allowances, before deducting any expenses or taxes).

Lenders use this metric to gauge how able you are to repay debts. In most cases, 43% is the highest DTI you can have to still qualify for a mortgage. Usually, lenders prefer a DTI under 36% that goes to an existing mortgage or rent payment. You can reduce your DTI by lowering monthly debt payments or increasing your income.

How to Calculate Your DTI Ratio

First, calculate how much you pay in debt each month. Add your:

  • Mortgage/bond
  • Auto loan/car repayments
  • Student loans
  • Personal loans
  • Credit card loans
  • Any other debt

Then, calculate your monthly gross income. This is the salary before tax. Include all sources of income, including your salary, side hustle income, passive income (like rental income) or money from another job.

Then, divide your debt by gross income. This should give you a decimal. Multiply the decimal by 100, and you’ll get your DTI.

Example

Anna makes R10 000 a month at her desk job and babysits on the weekends to make an extra R1 500. Her gross income is R11 500.

She makes monthly car payments of R1 500 and personal loan payments of R500.

If we divide her debt (R2 000) by her gross income (R11 500), we’ll reach the decimal 0.17391304347, which for simplicity’s sake we’ll round to 0.18.

If we multiply 0.18 by 100, we’ll see that her DTI is 18%.

What If My DTI Is Higher Than 43%?

If more than 43% of your income goes toward debt repayments, you’re getting dangerously close to being over-indebted.

If your debt makes up more than half of your income, you’re likely struggling to afford minimum repayments or living expenses. The answer? Debt review.

Debt review is a debt help system wherein a debt counsellor negotiates with your creditors for lowered debt repayments and interest rates. As soon as you apply for debt review, you’re automatically protected from legal action and losing your assets while saving on debt repayments. You’ll also gain access to a personalised payment plan, budgeting help and financial advice to stay financially fit.

The process lasts for 3-5 years. After you’ve repaid your debt, you’ll get a clearance certificate you can submit to the credit bureaus to expunge the flag from your credit profile. Then, you can start rebuilding your credit, and eventually, apply for credit and use it responsibly.

How to calculate your debt-to-income (DTI) ratio

If you need help with over-indebtedness, contact True North Debt. We would love to help you regain financial agency!