In Australia, the official cash rate and the interest rates on loans and bank accounts are two different things. The official cash rate, determined by our central banking system, significantly impacts the interest rates financial institutions assign to their product offerings. We will explore these two distinct rates, laying down their differences and identifying how they are related. This insight can steer you toward wise decisions when picking a loan or a bank account. So, let’s jump right in!

Understanding the Cash Rate

The monetary rate at which commercial banks obtain loans from a country’s central bank is the cash rate, base rate, or official interest rate. The Reserve Bank of Australia (RBA) sets the cash rate. It’s essential to note that the RBA uses this cash rate as a key instrument in its monetary policy toolbox, primarily aiming to control inflation and ensure the nation’s economic stability.

The RBA may lower the cash rate if the economy struggles to stimulate spending and investment. If the economy is overheating, it may raise the cash rate to curb inflation. The cash rate impacts everything from customer interest to goods and services prices. Here are five key points about the cash rate:

1. Economic Boost: The RBA might slash the cash rate when the economy grapples with sluggish growth or high joblessness. This step makes borrowing less costly, spurring spending. For instance, a fall in the cash rate from 1.5% to 1% could translate into an annual saving of about $2,500 on a $500,000 home loan’s interest payment. Such savings could increase economic activity as people have more expendable income.
2. Inflation Management: If the economy is thriving and there’s a danger of inflation escalating too rapidly, the RBA might hike the cash rate. This move can help temper the economy by making borrowing pricier.
3. Commercial Bank Interest Rates: The cash rate directly impacts the interest rates that commercial banks offer their clients. Banks typically modify their lending rates when the RBA alters the cash rate. If the RBA boosts the cash rate, your bank will likely raise its mortgage interest rate, and the opposite is also true.
4. Savings and Deposits: The cash rate directly influences the interest rates provided by banks for savings and deposits. When the cash rate increases, savers may enjoy improved returns as banks raise their interest rates on savings accounts and term deposits in alignment with the RBA. Conversely, the interest earned on savings and deposits might also decrease when the cash rate is low.
5. Housing Market Impact: The cash rate significantly affects the housing market. When the cash rate is low, borrowing becomes cheaper; this can increase home loan applications, causing a potential rise in property prices due to increased demand. On the other hand, a high cash rate, resulting in more expensive loans, can cool off the housing market as borrowing to buy property becomes costlier.

Cash Rate vs Interest Rate

At first, these two may appear alike, but they perform unique functions in finance and have varying effects on your home loan expenses.

1. Function in the Financial Sphere: The cash rate is a macroeconomic instrument the central bank uses to control the economy, manage inflation, and regulate economic growth. On the other hand, the interest rate is a borrowing expense set by individual lenders, influenced by factors like the cash rate, the lender’s funding costs, and the loan’s associated risk level.
2. Rate Determination: The RBA determines the cash rate. However, individual banks and lending establishments determine their own interest rates. Although the cash rate influences it, other factors like the lender’s business strategy and market competition also play a role.
3. Influence on Home Loan Expenses: Cash rate changes can directly or indirectly impact home loan interest rates. When the RBA slashes the cash rate, it diminishes the bank’s expense to access funds. Lenders often respond by lowering their interest rates, making home loans more financially accessible for borrowers. Conversely, an increase in the cash rate means higher bank borrowing costs. To counterbalance this expenditure, lenders often elevate their interest rates, which can lead to pricier home loans for borrowers.
4. Borrower Impact: Comprehending the differences between cash and interest rates is crucial for borrowers. It can assist you in predicting potential shifts in your home loan expenses. For example, if the cash rate is predicted to increase, you can secure your interest rate with a fixed-rate home loan.

How Cash and Interest Rates Affect Your Home Loan

Understanding their functions is essential for prospective homebuyers and homeowners alike. Here’s how they can affect your home loan:

1. Impact on Fixed vs Variable Rate Loans: Your susceptibility to cash and interest rate changes depends on the type of home loan you choose. When you choose a fixed-rate loan, your interest rate stays the same for a set duration, irrespective of any cash rate fluctuations. Conversely, a variable-rate loan can adjust according to the cash rate, resulting in potential changes to your repayments—either higher or lower.
2. Influence on Decisions about Refinancing: Changes in the cash rate could impact your considerations for refinancing your home loan. If there is a reduction in the cash rate, lenders may be more disposed to provide lower interest rates, making refinancing more enticing.
3. Effect of Loan Rates: The interest rate connected to your home loan directly affects the amount of your mortgage repayments. Even a minor adjustment in the interest rate can substantially affect both your monthly payments and the overall amount repaid throughout the loan’s duration.
4. Cash Rate Fluctuations: The cash rate can experience regular changes based on the country’s economic condition. If the central bank were to reduce the cash rate by 0.25%, and your lender passes on the entire cut, the interest rate on your $500,000 home loan might be reduced from 3.5% to 3.25%.
5. Strategic Planning for Future Rate Changes: Staying informed about economic forecasts and potential cash rate changes can help you plan strategically for the future. If there are indications that the cash rate may rise soon, you should consider locking in a current low rate with a fixed-rate home loan.

Strategies for Navigating Changing Rates

Understanding how cash and interest rates work is only half the battle. Having strategies to handle fluctuating rates is crucial. Consider these recommendations:

1. Stay Informed About RBA Announcements: The RBA convenes every first Tuesday of each month to assess economic conditions and determine cash rate adjustments. Keeping track of these updates can help you stay ahead and make informed decisions. Staying well-informed about these announcements allows you to foresee possible changes in your home loan interest rate and make suitable preparations.
2. Explore Various Home Loan Options: Numerous types of home loans exist, each with pros and cons. Fixed-rate loans provide stability by maintaining the same interest rate for a specific period, irrespective of market fluctuations. On the other hand, variable-rate loans offer potential savings if rates decrease but can also increase if rates rise. Split loans, partly fixed and variable, offer a balance of security and potential savings. Know more about the difference between these three home loan types here.
3. Consider making extra repayments: If your financial situation allows, adding extra repayments can lead to significant interest reduction over the loan’s duration. This strategy can accelerate your loan repayment and result in long-term savings.
4. Seek Professional Guidance: Consulting a financial advisor or mortgage broker can offer personalised insights based on your circumstances. They can assist you in navigating rate changes and making well-informed decisions about your home loan.
5. Regularly Review Your Loan: Regularly monitor your home loan to ensure it aligns with your requirements, especially during interest rate fluctuations. If you discover a more advantageous loan option, contemplating refinancing could be beneficial.
6. Have a Buffer: Interest rates can increase, leading to higher repayment amounts. To prepare for this possibility, having a financial buffer is wise. This way, you can manage increased repayments without straining your budget.
7. Understand Prepayment Penalties: Some home loans include penalties for early repayment. Be sure to understand these penalties to avoid unexpected costs if you plan to make extra repayments or pay off your loan early.
8. Utilise an Offset Account: One effective strategy is to utilise an offset account. This type of account is linked to your home loan, and the account balance is deducted from, or ‘offset’ against, the balance of your loan when calculating interest charges. This can result in significant interest savings over time. Find out more about what an offset account is here.
9. Stay Updated on Financial News: Lastly, staying informed about the broader economic landscape can help you make strategic decisions about your home loan. Regularly reading financial news, subscribing to relevant newsletters, and participating in webinars can keep you updated on trends and forecasts related to interest rates. Here at Lendstreet, we regularly provide market updates, insights, relevant home loan tips, and advice through our articles. You can check our entire library here.

Bottomline

Exploring your financial options amidst the constantly changing world of home loans and interest rates can be confusing. But you don’t need to handle it all by yourself. Lendstreet is here to lend a helping hand, providing expert guidance to help you comprehend these complexities and make informed decisions about your home loan.

If you are starting to feel the pressure of paying higher home loan repayments, you need to seek expert help now. Get started by booking a discovery call with Lendstreet. This will be a perfect time for us to understand your unique situation and offer advice tailored to your home loan needs. You can also contact us here.

Lendstreet is committed to empowering you to seize control of your financial future. Let’s set sail on this journey together. Let’s navigate the changing tides of cash and interest rates and make the most beneficial decisions for your home loan. Your financial future awaits!

If you’re a property investor looking to secure your next loan, you must consider all your options. Choosing between cross-securitisation (or cross-collateralisation) and stand-alone securities depends on your individual investment goals, your current financial situation, and the conditions of your current securities.

In this article, we’ll cover the potential benefits and drawbacks of both types of loans so that you can make an informed decision on your next investment.

What is cross-securitisation?

Cross-securitisation (also known as cross-collateralisation) is when more than one property is used to secure a loan or multiple loans. For instance, if someone owns sufficient equity in their home and wants to buy another property, they could finance 100% of the investment property price plus any other purchase costs.

It’s not typically possible to borrow 100% of the stand-alone security value, and you’ll need to offer a second security for the loan. With cross-securitisation, the loan would be secured by the investment property being bought and the homeowner’s existing property.

So, in simple terms, cross-collateralisation is when you take out one loan with two security properties that are tied together.

When is cross-securitisation useful?

Cross-securitisation (or cross-collateralisation) involves using multiple properties to secure singular or multiple loans with the same lender. But when is cross-collateralisation beneficial for property investors?

When purchasing multiple properties

If a property developer is purchasing more than one investment property for their property portfolio, cross-securitisation (or cross-collateralisation) can effectively pool them together to obtain a larger investment loan with the same lender. This can be particularly advantageous if the investor wants to finance several projects simultaneously.

Buying an investment property

Cross-collateralisation can be used to manage the cash flow of multiple investment properties. By combining more than one investment property, the investor can negotiate the loan structure for more flexible repayments or use the cash flow from one property to finance the others.

How does cross-securitisation compare to stand-alone securities?

Unlike cross-collateralisation loans, stand-alone security refers to when one property is used to secure a new investment property through a loan or mortgage. For instance, an investor may have an owner-occupied property loan with one lender but two or more properties with different lenders.

Stand-alone securities offer a simpler loan structure since a property developer can focus solely on the risks associated with their new investment property. However, unlike cross-collateralisation, stand-alone securities may result in higher interest rates and a less flexible loan structure.

What are the benefits of cross-securitisation?

Cross-collateralised loans offer many benefits to property investors, including:

1. Increased borrowing capabilities: By using multiple properties as collateral, borrowers may access larger investment loans than they would with a traditional home loan.
2. More flexibility: Cross-securitisation offers greater flexibility in the types of properties eligible for collateral, including investment properties, commercial properties, and (sometimes) empty land.
3. Competitive interest rates: A cross-collateralised loan gives borrowers lower interest rates than an unsecured home loan since the lender takes on less financial risk.
4. Simplified loan management: Cross collateralisation allows borrowers to bundle their loans into one easy-to-manage package, so they only need to make one monthly repayment.

Potential drawbacks of cross-securitisation

1. Limited selling ability: Since cross-collateralised loans use multiple properties as collateral, investors can find it challenging to sell or refinance individual homes. Depending on the lender, you may need to keep all properties as collateral until the loan is repaid.
2. Increased risk: Using multiple properties as collateral means borrowers put more assets at risk if they default. So, if the borrower cannot meet their loan repayments, they may be forced to sell their properties and will miss out on the sale proceeds.
3. Difficulty in refinancing: If a borrower decides to refinance their cross-collateralisation home loan, they may encounter difficulty finding one lender willing to take on multiple properties as collateral.

What are the benefits of stand-alone securities?

Stand-alone securities are beneficial for investors looking to purchase a new property for the following reasons:

1. Simple loan structure: Stand-alone securities are simple and easy to understand, as they are typically backed by a single asset or cash flow stream, such as a single mortgage or a pool of credit card debt.
2. More transparency: Stand-alone securities are typically more transparent than other loans (cross-collateralised) as assets are easy to value.
3. Diversified portfolios: By allowing investors to invest in a range of assets, stand-alone securities can allow individuals to cultivate a diverse portfolio of properties, from owner-occupied to commercial.

Potential drawbacks of stand-alone securities

Investors must consider the potential drawbacks of stand-alone securities when investing in property. There are several potential downsides, including:

1. Concentration risk: Property stand-alone securities are often of a similar property type and concentrated in the same area, which can leave investors exposed to a higher level of risk, particularly if there is a downturn in the local market.
2. Economic risk: Stand-alone securities for property can be sensitive to changes in economic conditions, impacting the level of cash flow.

Consider your best investment loan options with Lendstreet.

If you want to purchase a second home or diversify your property portfolio, consider consulting with a professional mortgage broker to assess your best options.

At Lendstreet, we’re experts in helping you find the best investment loans to reach your financial goals. Contact one of our professional mortgage brokers today for professional advice.

FAQs

Is cross-securitisation or stand-alone securities better for purchasing investment property?

Whether cross-securitisation or stand-alone securities are best for you depends on your risk tolerance, financial situation, and investment goals. For personal advice, consult with a mortgage broker.

What is an investment home loan?

An investment home loan is a type of loan that is used to purchase or refinance an investment property. They can be used to buy various property types, from commercial to short-term rentals.

Can I keep the sale proceeds of a property when taking out a cross-securitisation loan?

When taking out a cross-securitisation loan, lenders will typically require that borrowers give lenders a claim over all properties used as security. The proceeds of any sales may be used to pay off the outstanding loan balance.

Your credit score reflects your personal and financial information. It predicts your financial behaviour, like how likely you are to repay your loan on time.

Lenders use credit scores to decide whether giving you credit is viable. Knowing the ins and outs of your credit report, including your repayment history, is essential. It allows you to not only negotiate a better loan deal but helps you to understand why a lender is rejecting you and make improvements to your credit report over time.

If you’ve ever applied for a loan or credit card, you’ll have an active credit report.

How do I check my credit score?

Why is your credit rating important?

Without a good credit score, credit providers will unlikely let you borrow or access credit cards or loans. Having a good repayment history is, therefore, essential.

Your credit file can affect your ability to take out loans for years to come. You could be refused credit without a decent credit score, including a mortgage, car loan, or credit card. This can stunt your future financial goals.

How credit scores are calculated

How is a credit score calculated? Five factors affect credit scores, and lenders will check this before letting you apply for a home loan.

These include:

• Payment history. This accounts for 35% of your credit score and shows whether you make payments and whether you often miss any. Payments late by over 30 days will be reported by your lender and lower your credit scores.
• Outstanding loan balance. Making up 30%t of your credit score, this is based on how many accounts and the type, as well as the overall amount you owe. Having lots of high balances and maxed-out credit cards will negatively affect your credit report.
• Credit history length. Your credit report length makes up 15% of your overall score. The longer your history of making payments and taking out credit, the higher your score.
• Types of accounts. This makes up 10% of your credit rating. Having various accounts, such as home loans and credit cards, will improve your credit score over time.
• Recent credit history. The final 10% of your credit report is recent credit history. For instance, if you’ve opened lots of new accounts in the last few months it could indicate financial hardship and lower your score.

Take note, different credit reporting agencies may have slightly different weighting or criteria.

Is a credit score check free?

Yes, you can access a free credit score online or by mail, and you can access your credit report every three months. To stay current with your financial situation, we recommend accessing your credit report every year to assess your progress.

Why should I check my credit score report?

Regularly checking your credit report will allow you to understand better your financial situation and how to expand your credit limits over time.

If your credit score is low, it might be time to practice credit repair. You can do this by studying your credit reports and implementing various strategies, including:

• Paying bills on time
• Paying off credit cards and existing loans
• Making small, regular payments

How can I fix errors in my credit score report?

If you find an error on your most recent credit report, dispute the information with the reporting company, such as Equifax or Experian. Explain in writing what is inaccurate and include evidence through documentation to support your dispute. If this has happened to you, try not to panic. Your credit score will be rectified when the dispute is settled.

You can also work with a credit repair company. Some potential benefits of working with a credit repair company include:

1. Expert advice and guidance: Trusted credit repair companies have a deep understanding of credit reporting laws, regulations, and procedures, and can offer expert advice and guidance on how to improve your credit score and manage your finances more effectively.
2. Credit report analysis: Credit repair companies can analyse your credit report and identify any errors or inaccuracies that may negatively affect your credit score. They can then work with credit reporting agencies to correct or remove these errors.
3. Debt management strategies: Credit repair companies can offer debt management strategies and tools to help you pay off your debts and improve your overall financial health.
4. Credit score monitoring: Many credit repair companies offer credit score monitoring services, which allow you to keep track of your credit score and receive alerts if there are any significant changes.
5. Access to credit-building products: Some credit repair companies offer credit-building products, such as secured credit cards or credit builder loans, which can help you improve your credit score over time.

If you’re thinking of working with a credit repair company, do your research first to choose a reputable and trustworthy one.

Can I get a home loan with a low credit score?

Getting a home loan with a low credit score is possible, but it can be more challenging and may come with higher interest rates and fees. Lenders use credit scores to assess the risk of lending money to an individual, so a low credit score may indicate to them that you are a higher-risk borrower.

Looking for a home loan? Consult with Lendstreet

At Lendstreet, we aim to help Aussies find the right home loan that best suits their needs.

We can also explain how your credit score will determine your search for a home loan.

Consult with one of our professionals today to find the right home loan for you – whether you’re purchasing your first property or refinancing your mortgage.

FAQs

What is a good credit score in Australia?

Equifax and Experian generally consider a credit score above 660 to be good. However, Illion has a different standard and considers a credit score of 500 as good. Read more here.

Will missing loan repayments affect my credit health?

Yes, regularly missing loan repayments will negatively impact on your credit health. Your payment history accounts for 35% of your overall score, so avoiding missing payments is essential.

How do I improve my credit score?

To improve your credit score, you can take the following steps:

1. Review your credit report for accuracy and completeness.
2. Dispute any errors you find on your credit report.
3. Make timely payments on your bills and loans.
4. Avoid excessive credit applications and unnecessary expenses.

For many Australians, buying a home is one of the most significant investments they’ll make in their lifetime. And with the average Australian mortgage spanning over 30 years, finding the right home loan can save you thousands of dollars in interest over the life of the loan

One decision that many homebuyers face is whether to make monthly or fortnightly mortgage payments. Whether you’re a first home buyer or looking to move up the property ladder, the frequency you pay your home loan can make a difference to the interest rates you’ll pay.

The two most common types of repayments are monthly and fortnightly, though some opt for weekly repayments. There are pros and cons to both, and you’ll need to carefully assess your financial situation before making a decision.

Which option is better? Let’s explore them more below.

Monthly repayments

Most people choose to pay their mortgage through monthly repayments. With monthly payments, you pay a set amount each month over the course of your loan term. For example, if you have a $500,000 mortgage with a 4% interest rate and a 30-year term, your monthly mortgage payment would be $2,387.

The primary advantage of monthly mortgage payments is convenience. Since most of our bills are due monthly, it’s easy to keep track of your mortgage payment and make sure it’s paid on time. Additionally, some lenders may only allow monthly payments, so it’s important to check with your lender before making a decision.

Fortnightly repayments

Fortnightly payments involve paying half of your monthly mortgage payment every two weeks. Using the same example above, your fortnightly mortgage payment would be $1,193.50.

By making fortnightly payments, you make 13 monthly payments per year instead of 12. This means that you’re paying off your principal faster, saving you thousands of dollars in interest over the life of your loan.

Using the same example as above again, if you were to make fortnightly payments instead of monthly payments, you would save $69,043 in interest over the life of your loan and pay off your mortgage four years earlier.

Another advantage of fortnightly payments is that they can help you build equity in your home faster. Since you’re paying off your principal faster, you’ll have more equity in your home in a shorter amount of time. This can be helpful if you plan to sell your home or use your home’s equity for a home equity loan or line of credit.

Let’s look at a case study:

John and Sarah are looking to take out a new home loan together, totalling $500,000 at a variable interest of 3.27% per year. After deliberations, they both decided that they would repay the principal and interest over the course of 30 years.

Using Lendstreet’s mortgage repayments calculator, they estimate their monthly repayment costs to be $2,182.52, excluding ongoing or annual fees.

However, if they switch to fortnightly repayments and instead pay $1,091.76 every two weeks, John and Sarah will pay off more on their loan by the end of the year and will pay less interest, saving significant money in the long term.

If John and Sarah stay on a fortnightly schedule, they would pay off their entire home loan nearly four years sooner and save $41,292 in interest (excluding fees and assuming their interest rate remained the same throughout the loan).

If they opted for weekly repayments of $545.38, they would save more than fortnightly repayments – around $41,660.

Clearly, fortnightly mortgage payments are a fantastic option for lenders looking to pay less interest in the long term and aiming to pay off their mortgage quicker.

Factors to consider before switching to fortnightly repayments:

While making fortnightly mortgage payments can be a great way to save money on interest and pay off your loan faster, it’s essential to consider a few things before making the switch.

1. Your Budget: Switching to fortnightly payments means you’ll make more frequent payments, which could impact your monthly budget. Before making the switch, make sure you have enough income to cover the increased frequency of payments.
2. Lender Policy: Not all lenders offer fortnightly payments, so you’ll need to check with your lender to see if this is an option. Some lenders may also charge additional fees for making more frequent payments, so you know of any potential costs before making the switch.
3. Payment Timing: Making more frequent payments means you’ll need to keep track of payment due dates more closely. You could be hit with additional fees and penalties if you miss a payment.
4. Other Debts: Consider your other debts and financial goals before switching to fortnightly payments. If you have high-interest debt, such as credit card debt, it may make more sense to pay it off first before focusing on your mortgage.
5. Financial Goals: Consider your financial goals and whether switching to fortnightly payments aligns with them. If you plan to sell your home or refinance soon, it may not make sense to switch to fortnightly payments.

1. Make extra payments: You can make additional payments on your mortgage each month or make a lump sum payment each year. By paying more than the minimum amount due, you can reduce the interest you pay and pay off your loan faster.
2. Refinance your mortgage: Refinancing your mortgage can help you get a lower interest rate and reduce your monthly payments. You can also choose a shorter loan term, such as a 15-year mortgage, to repay your loan faster.
3. Offset your account: Another way to pay off your mortgage faster is by offsetting your account. This means you have a savings account linked to your mortgage account, and any money in your savings account is offset against your mortgage balance. As a result, you’ll pay less interest on your mortgage, and your savings will earn interest at the savings account rate.
4. Avoid interest-only loans: If you have an interest-only loan, you’re only required to pay the interest each month, and the principal balance remains the same. As a result, you’ll end up paying more in interest over the life of the loan, and it will take longer to pay off your mortgage. If possible, avoid interest-only loans and opt for a principal and interest loan.
5. Increase your mortgage payments: If your financial situation improves, you can increase your mortgage payments to pay off your loan faster. This can help you build equity in your home faster and save money on interest.
6. Make lump sum payments: If you receive a windfall, such as a bonus or tax refund, you can use it to make a lump sum payment on your mortgage. This can help you pay off your loan faster and reduce the amount of interest you pay.

When considering these options, weighing the potential benefits against any costs, such as refinancing fees or prepayment penalties, is important. It’s also a good idea to consult with a financial advisor or mortgage specialist to help you make the best decision for your financial situation and goals. With the right strategy, you can repay your mortgage faster and achieve your financial goals sooner.

At Lendstreet, we’re committed to helping you find the right loan that meets your needs. If you require a mortgage broker, we’re here to give you expert advice to guide you through the home loan process.

Contact a mortgage broker today to discuss your future home.

A principal payment is made to repay the original amount of money borrowed to pay for a property. In comparison, an interest payment is a fee you pay when taking out a mortgage. This is calculated as an annual percentage of the home loan.

Principal and interest payments both contribute to paying off your mortgage.

When you make fortnightly mortgage payments, you make 26 payments yearly, or 13 full payments. Instead of making one full payment per month, you’ll make half of your monthly payment every two weeks. This means you’ll make 26 half payments, which add up to 13 full payments per year.

The amount you can save by paying fortnightly depends on your loan amount, interest rate, and loan term. However, as a general rule, paying fortnightly can help you pay off your mortgage several years earlier and save thousands of dollars in interest over the life of your loan.

What are debt-to-income ratios (DTIs)?

Your DTI is simply your total liabilities and debts divided by your gross annual income, calculated in order to reveal your full debt exposure. Banks and lenders use your DTI to ensure you are eligible for personal loans and can meet loan repayments in the future.

How to calculate debt-to-income ratios

The DTI calculation is simple to calculate if you know your total debts and your gross income.

Calculate by using this formula:

(liabilities + debts) ÷ yearly gross income = DTI ratio

Alternatively, you can also use a debt-to-income ratio calculator.

What income types are used to calculate your debt-to-income ratio?

Income considered in the calculator of your DTI ratio includes:

• Your gross income (pre-tax)
• Overtime pay and bonuses
• Casual/contract work income
• Commission
• Rental income from investment properties
• Dividends from share trading
• If self-employed, net profit before tax

What income types are used to calculate your debt-to-income ratio?

Income considered in the calculator of your DTI ratio includes:

• Your gross income (pre-tax)
• Overtime pay and bonuses
• Casual/contract work income
• Commission
• Rental income from investment properties
• Dividends from share trading
• If self-employed, net profit before tax

What debts are included in the DTI calculation?

As a rule of thumb, debts included in your income ratio DTI calculation only count if they show up on your credit report. These might include debts & liabilities such as:

• Your credit card debt (the amount you owe)
• Micro-financing or instalment plans, such as Afterpay or Klarna
• Any personal loans
• Car loans or asset finance
• HECS/HELP loans
• Home loans or mortgages
• Investment loans or lines of credit

Example of the DTI ratio

Faye and Dean are looking to take out a mortgage worth $750,000 on an Australian property. Currently, they both earn $125,000 a year, making their gross income $250,000. The couple also owns two credit cards with a combined monthly limit of $5,000.

They calculate their income ratio (DTI) using the following formula:

$755,000 ÷ $250,000 = 3.02

Faye and Dean’s DTI ratio is 3.02, meaning their total debt is 3.02 times their combined income.

But does this show good financial health?

What is a good DTI ratio?

DTI ratio is usually categorised as low, medium, or high:

• Low DTI: 3.0 or below, considered excellent
• Medium DTI: 4.0 – 6.0, considered good but not excellent
• High DTI: 7 – 9.0 or higher, considered risky

However, the big four banks in Australia have their own way of grading and accepting DTI. They also increase and lower their DTI limit depending on the changing interest rate, property values, market movements and other factors.

As of December 2022, here are the maximum DTI ratio accepted by the big four:

• ANZ: 7.5
• Commonwealth Bank: 7.0 (requires manual approval from their credit department)
• National Australia Bank: 8
• Westpac: 7 (your application will be referred to their credit department for further review)

How do banks & lenders use debt-to-income ratios?

As we’ve said, banks and lenders use your DTI to estimate your ability to pay and manage your personal loan repayments to ensure you can repay the money you want to borrow.

What to do if you have a high DTI ratio

If you’ve found yourself in financial hardship and are struggling to make your monthly debt payments with your gross monthly income, you’ll likely have a high DTI ratio.

With a high DTI ratio combined with a high credit utilisation ratio, you’ll struggle to secure a mortgage loan or car loan. If your gross monthly income is unlikely to increase over the next year, you’ll need to take the necessary steps to lower your DTI ratio.

To lower your DTI ratio:

• Devise a financial plan to pay off credit card balances.
• Make higher monthly debt payments to lower the amount owed. Increasing your monthly payments will go a long way in shrinking your personal debts.
• Discuss lowering your interest rates with creditors or mortgage lenders which will help you build savings that can be used to pay off monthly debt balances.
• Avoid taking on more debt while you pay down your current debt payments
• Increase the length of your mortgage to lower your monthly mortgage payments

How to calculate your combined monthly debt payments

Your total monthly debt payments are the combined monthly amount you owe creditors or lenders for the money you’ve borrowed. Types of monthly debt payments include:

• Mortgage or rent payments
• Credit card repayments
• Child support
• installment plans

To calculate your total monthly debt payments, check your monthly outgoings, including your mortgage payment or rent payment, minimum payments on credit cards, and any other debts. This will help you devise a plan to lower your DTI ratio and improve your loan application success.