What Is Debt-to-Income Ratio?
Your debt-to-income (DTI) ratio is a financial metric that compares your total monthly debt payments to your gross monthly income. It is expressed as a percentage and is one of the key factors lenders use to determine whether you can afford a new loan payment.
For example, if your gross monthly income is CAD $5,000 and your total monthly debt payments are CAD $1,500, your DTI ratio is 30%. This means 30% of your gross income is committed to debt repayment.
A lower DTI ratio indicates that you have more disposable income relative to your debts, making you a lower-risk borrower in the eyes of lenders.
How to Calculate Your DTI Ratio
Calculating your DTI ratio is straightforward. Follow these steps:
- Step 1: Add up all monthly debt payments (rent/mortgage, car loan, student loans, credit card minimums, any other loan payments)
- Step 2: Determine your gross monthly income (before taxes and deductions)
- Step 3: Divide total monthly debts by gross monthly income
- Step 4: Multiply by 100 to get the percentage
DTI Calculation Example
If you earn CAD $6,000/month gross and pay CAD $800 rent + CAD $300 car loan + CAD $200 credit card minimums = CAD $1,300 total debt. Your DTI = ($1,300 ÷ $6,000) × 100 = 21.7%.
What Is a Good DTI Ratio for Loan Approval?
In Canada, lenders generally use two debt service ratios. The Gross Debt Service (GDS) ratio focuses on housing costs and should be below 32-39%. The Total Debt Service (TDS) ratio includes all debt payments and should ideally be below 40% for personal loan approval.
| DTI Range | Assessment | Loan Approval Likelihood |
|---|---|---|
| Below 30% | Excellent | Very high—best rates available |
| 30% – 36% | Good | High—competitive rates |
| 36% – 40% | Acceptable | Moderate—may face higher rates |
| Above 40% | High risk | Difficult—limited options, highest rates |
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How DTI Affects Your Interest Rate
Your DTI ratio does not just affect whether you are approved—it also influences the interest rate you receive. Borrowers with lower DTI ratios are viewed as lower risk and typically qualify for more competitive rates.
Even if two borrowers have identical credit scores, the one with a lower DTI ratio will usually receive a better rate offer. This is because a lower DTI indicates more financial breathing room and a lower probability of default.
Strategies to Lower Your DTI Before Applying
If your DTI is too high, take these steps to improve it before applying for a personal loan.
- Pay off or pay down credit card balances
- Pay off small loans to eliminate monthly payments
- Increase your income through additional work, freelancing, or negotiating a raise
- Avoid taking on new debt in the months before applying
- Refinance existing loans at lower rates to reduce monthly payments
- Consider debt consolidation to simplify and potentially reduce payments
What Counts (and Does Not Count) in DTI
Not all monthly expenses are included in the DTI calculation. Only recurring debt obligations are counted.
| Included in DTI | Not Included in DTI |
|---|---|
| Mortgage or rent payment | Utilities (electric, gas, water) |
| Car loan payment | Groceries |
| Student loan payment | Insurance premiums (unless bundled in mortgage) |
| Credit card minimum payments | Cell phone bill |
| Personal loan payments | Subscriptions and memberships |
| Child support or alimony | Transportation costs |
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