Debt-to-Income (DTI) Ratio: How to Calculate Your DTI

Understanding your debt-to-income (DTI) ratio is crucial for assessing your financial health in Singapore. It’s more than just a calculation — it's a critical tool for navigating loan approvals and achieving financial stability.

Beyond a mere percentage, your DTI provides a clear snapshot of your financial health, revealing how effectively you manage debt against your income (or if you’re perhaps taking in too much debt). 

This article goes beyond basic calculations to illuminate how lenders in Singapore scrutinise this metric, and how you can strategically leverage this knowledge to optimise your financial decisions, ultimately enhancing your borrowing potential and fostering sound financial planning.

How to calculate DTI using a ratio calculator

A DTI ratio calculator simplifies the process of determining your financial standing by quickly calculating your debt-to-income ratio. To use the calculator on this page, input your total monthly debt payments, including loan repayments, credit card minimums, and rent or mortgage. Then, enter your gross monthly income. The calculator will generate your DTI ratio, providing an instant snapshot of your financial health.

Calculating your debt-to-income ratio manually

To manually calculate your debt-to-income (DTI) ratio, you'll need to determine your total monthly debt payments and your gross monthly income. The formula is straightforward: DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100. This will give you your DTI as a percentage, which lenders use to assess your financial health.

Here’s a step-by-step example:

1. Calculate total monthly debt payments

• Include all recurring monthly debt obligations. For a Singaporean resident, this might include:

• Housing loan repayments or rent.

• Car loan repayments.

• Student loan repayments.

• Minimum credit card payments.

• Personal loan repayments.

• Any other regular debt repayments, such as outstanding amounts on a home equity line of credit.

• Court-ordered payments like child support.

• For example, let’s say your housing loan repayment is $1,500, your car loan is $500, and your minimum credit card payments total S$300. Your total monthly debt payments would be $2,300.

2. Determine gross monthly income

• Include all sources of income before any deductions like CPF contributions or taxes. This might include:

• Salary from full-time employment.

• Income from part-time jobs.

• Freelance or gig work income.

• Bonuses or commissions.

• Rental income from properties.

• Any regular allowances received.

• For instance, if your monthly salary is $7,000 and you receive $500 in rental income, your gross monthly income is $7,500.

3. Apply the formula

• Divide your total monthly debt payments by your gross monthly income and multiply by 100.

• In our example: ($2,300 / $7,500) x 100 = 30.67%. Therefore, your DTI ratio is approximately 30.67%.

Important notes

• What to include:

• Focus on recurring monthly debt obligations.

• Include all consistent income sources.

• What to exclude:

• Exclude variable expenses like groceries, utilities, phone bills, insurance, childcare, and recreational spending. These are living expenses, not debt obligations.

By following these steps, you can manually figure out DTI ratio and understand how lenders might view your financial situation.

How lenders assess your DTI ratio

Lenders in Singapore use the DTI ratio to assess your ability to repay loans. A lower ratio indicates a more manageable debt load. Typically, lenders prefer a DTI ratio below 36% for most loans, though some may have flexibility depending on the loan type. A higher DTI ratio can lead to higher interest rates or loan rejection, while a lower DTI increases the likelihood of favourable loan terms.

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In Singapore, lenders also heavily consider the Total Debt Servicing Ratio (TDSR) when assessing loan applications, particularly for property loans. The TDSR framework, implemented by the Monetary Authority of Singapore (MAS), limits the amount a borrower can spend on debt repayments to 55% of their gross monthly income.

The relationship between DTI and your credit score

While your DTI ratio and credit score are related, they are distinct factors. Your DTI ratio is not directly included in your credit score calculation. Credit scores in Singapore, primarily calculated by the Credit Bureau Singapore (CBS), are determined by factors such as:

• Payment history: How consistently you've made payments on your credit accounts.

• Credit utilisation: The amount of credit you're using compared to your available credit.

• Length of credit history: How long you've had credit accounts.

• Types of credit: The mix of credit you use (e.g., credit cards, loans).

• New credit: Recent applications for credit.

However, a high DTI ratio can suggest financial strain to lenders, potentially affecting their perception of your creditworthiness, even if your credit score remains high. Lenders may view a high DTI as an indicator that you are overextended, increasing the risk that you might struggle to repay a new loan, regardless of a good credit score.

Interpreting your DTI ratio

Your DTI ratio indicates the proportion of your income dedicated to debt repayment, providing insights into your overall financial health. Understanding what your DTI ratio signifies is crucial for effective financial planning. Here's a general breakdown:

• DTI ratio below 20%: This is considered excellent.

• It indicates that your debt is very manageable relative to your income.

• You likely have a strong ability to meet your financial obligations and can comfortably handle new financial commitments.

• DTI ratio between 20% and 36%: This is generally considered manageable.

• It suggests that you have a good balance between your income and debt.

• You should be able to meet your current obligations and have some capacity for additional borrowing.

• DTI ratio between 37% and 42%: This indicates that you are approaching a higher debt level.

• Lenders may view this range with some caution, and you might encounter more difficulty securing new loans.

• It's advisable to focus on paying down debt to improve your financial flexibility.

• DTI ratio between 43% and 50%: This is a high DTI ratio.

• It suggests that you are carrying a significant debt burden, and lenders will likely be concerned about your ability to repay.

• You may face challenges in obtaining new credit, and it's essential to prioritize debt reduction.

• DTI ratio above 50%: This is a very high DTI ratio.

• It indicates that you are heavily burdened by debt, and your borrowing options will be severely limited.

• Aggressive debt management strategies and potentially professional financial advice are recommended.

Strategies for lowering your DTI ratio

To improve your DTI ratio, consider the following strategies:

• Reduce high-interest debt: Paying off high-interest loans and credit card balances will significantly reduce your monthly debt obligations. Focus on the debt with the highest interest rate first to minimise overall interest paid.

• Refinance existing loans: Refinancing loans, such as student loans or mortgages, can potentially lower your monthly payments. This is a good strategy if you qualify for better interest rates or more favourable loan terms.

• Explore debt consolidation options: Debt consolidation involves combining multiple debts into a single loan with potentially lower monthly payments. This can simplify your repayment schedule and reduce your overall debt burden.

• Increase your income: Finding ways to increase your income, even temporarily, can lower your DTI ratio. Consider part-time work, freelancing, or selling unused items.

>> More: 4 ways to pay off credit card debt in Singapore