The Australian home loan application process has become considerably more complex over the past few years. A number of reasons have led to this, e.g., the imposition of tighter lending standards by financial regulators, constant rate hikes, and the general rise in household debt levels in the country.
Lenders are more cautious and scrupulous when assessing the financial standing of borrowers. One of the keys among the tools they employ to assess risk is the debt-to-income (DTI) ratio. This measures the borrower’s gross monthly income against the sum of monthly debt repayment, thus giving lenders a complete picture of the borrower’s ability to repay further loan installments in addition to existing financial commitments.
Understanding Debt-to-Income Ratio (DTI)
What is DTI and How is it Calculated?
Your debt-to-income ratio compares your total monthly debt repayments to your gross monthly income. It’s used to measure how much of your income goes towards paying off debt.
Formula:
DTI Ratio = Total monthly debt payments ÷ Gross monthly income
Example:
Monthly Debt (Loans, Credit Cards)
Monthly Income
DTI Ratio
$3,000
$9,000
0.33 (33%)
The lower the DTI ratio, the less risky you are in the eyes of a lender.
Why Lenders Prioritise DTI in 2025
In 2025, lenders are taking a stricter view of high DTI ratios. With interest rate volatility and cost-of-living pressures, banks want to ensure borrowers can manage their repayments without falling into hardship.
According to the Australian Prudential Regulation Authority (APRA), any DTI ratio above 6 is considered high risk. Many banks now have internal policies that cap DTI ratios even lower than that.
Current Lending Criteria in Australia
APRA’s Guidelines on High DTI Loans
APRA recommends lenders limit the number of new loans issued to borrowers with DTI ratios greater than 6. These guidelines aren’t laws but are closely followed by banks to reduce financial system risk.
In its 2023 report, APRA found that nearly 20% of new loans had DTI ratios over 6. Since then, major banks have adjusted their risk appetites.
Bank-Specific DTI Limits and Policies
Bank
Typical DTI Cap
ANZ
6.0
NAB
6.0
Westpac
7.0
Commonwealth Bank
7.0
Impact of DTI on Home Loan Approval
Case Studies: Practical Examples
Here are some instances of current lending practices in Australia to help you understand how debt-to-income ratios affect house loan decisions.
A Brisbane applicant with a DTI ratio of 4.8 applied for approval of a $600,000 loan. A steady, full-time salary and little outstanding debts allowed the lender to evaluate the application favorably. This example shows that a stable income and a reasonable DTI ratio increase the chances of approval by lowering perceived financial risk.
Another pair from Perth sought an $850,000 mortgage while their combined DTI ratio beyond six told a different story. Exceptional credit card balances and a car loan propelled this increased percentage.
The lender rejected the application despite two salaries because of the great debt levels and advised the candidates to lower their debts prior to reapplying. This shows how a lower DTI ratio can directly reduce the likelihood of loan approval since lenders give borrowers’ ability to pay off debts consistently top priority.
These illustrations highlight the important part the debt-to-income ratio counts in determining loan eligibility. Improving your chances of home loan approval in today’s more stringent lending environment depends on your ability to control your DTI ratio.
Strategies to Improve Your DTI Ratio
- Pay off credit card balances and personal loans
- Refinance existing debts to lower repayments
- Avoid taking on new financial commitments
- Increase income through part-time or freelance work
Reducing your DTI doesn’t just improve your approval chances. It also puts you in a stronger financial position long-term. For a clearer picture of your financial position, Empower Money offers tools and resources tailored to help you navigate loan eligibility.
Regional Variations in Lending Practices
How DTI Considerations Differ Across Australian States
State
Lending Activity
DTI Flexibility
NSW
High
Low
VIC
High
Medium
QLD
Moderate
Medium
SA
Low
High
WA
Moderate
Medium
In cities like Sydney and Melbourne, lenders apply stricter DTI scrutiny due to higher property prices and higher loan sizes. In Adelaide or Hobart, the same DTI may not raise red flags.
Urban vs. Rural Lending Criteria
Borrowers in rural areas may face different assessment models compared to those in cities. While lower property prices can make loans more accessible, rural applicants might be scrutinised more closely for income stability and job security.
Seasonal work, self-employment, or industry-specific risks, common in rural regions, can influence how lenders view your DTI ratio. A stable income source and clean credit history can improve your standing, but a higher perceived risk may reduce your chances of home loan approval. Lenders may also consider the long-term resale value of rural properties, adding another layer of assessment in the approval process.
Expert Insights and Recommendations
Financial Advisors’ Tips for Prospective Borrowers
Financial expert Scott Pape warns that a high debt-to-income ratio can do more than just impact your home loan approval. It may also reduce your long-term financial flexibility, limiting future options. To boost your approval odds, aim for a DTI ratio under 5.0, maintain a savings buffer of at least three months’ worth of repayments, and ensure your employment history and income are stable and well-documented.
Preparing Your Finances for Loan Approval
- Review your current debts
- Consolidate loans where possible
- Build your savings
- Get pre-approval to understand your borrowing limit
Many lenders now use automated systems to assess DTI upfront. This means errors in your application or incomplete financial info can lead to a quick rejection. Empower Money also encourages borrowers to review their servicing position early in the process to maximise their chances of home loan approval.
Conclusion: Navigating Home Loan Approval in 2025
Your chances of mortgage approval depend on your debt-to-income (DTI) ratio. With lending criteria strict all around Australia, maintaining your DTI far below the APRA-advised threshold of 6 is more vital than ever.
Lowering debt and increasing income helps improve approval prospects and strengthens your financial position overall. Before applying, consider using the Servicing Calculator to check where you stand. This small step can give you clarity and control.