Debt-to-income ratio: what is it, and when is it too high?

If you have total debt of 2.000.000 kr. and an annual income of 500.000 kr., your debt-to-income ratio (gældsfaktor) is 4. That does not automatically mean the bank says no. But a debt-to-income ratio above 4 is generally regarded as high and can affect the bank's overall assessment and the loans it can offer.^[1]

In brief

• The debt-to-income ratio is total debt divided by annual income before tax.
• The debt-to-income ratio shows the ceiling for your total debt. It does not directly show how expensive a home you can buy.
• Your possible purchase budget is, roughly speaking, the new housing debt plus the money of your own you put towards the purchase price. Disposable income (rådighedsbeløb) can set a lower ceiling.
• Home loans, student loan debt, car loans, consumer loans and other debt all count towards total debt.
• When you buy a home together, the household's combined debt and income are used.
• The Danish FSA (Finanstilsynet) generally regards a debt-to-income ratio above 4 as high.^[1]
• A debt-to-income ratio above 4 is not an automatic rejection or a universal lending limit.
• A high debt-to-income ratio can restrict access to certain risky loans, especially if the loan-to-value ratio, LTV (belåningsgrad) is also high.^[2]
• At the same time, the bank looks at disposable income, down payment, net worth, income and the home itself.

What is a debt-to-income ratio?

The debt-to-income ratio sets your total debt against your annual income before tax.

The formula looks like this:

Total debt ÷ annual income before tax = debt-to-income ratio

The figure tells you how many times your annual income your debt amounts to.

The debt-to-income ratio does not tell you what the loan costs each month. Nor does it tell you how much money you have left for food, transport and the rest of life.

It shows one specific thing: the size of your debt relative to your income.

Example of working out a debt-to-income ratio

You want to buy a home and expect to have these loans after the purchase:

Your annual income before tax is 750.000 kr.

The calculation is:

3.000.000 kr. ÷ 750.000 kr. = 4,0

Your debt-to-income ratio is therefore 4.

If the student loan debt were left out of the calculation, the ratio would look lower. That is why it is important to include all debt.

What counts towards total debt?

The starting point is the debt the household will have after buying the home.

This can include:

• Mortgage loan (realkreditlån)
• Bank loan for the home
• Outstanding debt (restgæld) from a previous home
• Student loan debt (SU-gæld)
• Car loan
• Consumer loan
• Overdraft
• Credit card debt
• Other private loans

If you have financed part of the down payment (udbetaling) with another loan, that loan does not disappear from the bank's calculation. The supplementary financing must be included in the assessment of both the debt-to-income ratio and disposable income.^[1]

A credit facility can also matter, even if you have not drawn the full amount. How the bank treats different types of credit depends on the bank's method and the documentation.

Which income is used?

The debt-to-income ratio is worked out using annual income before tax.

For an employee, it will typically start with the fixed salary. Other income may require a closer assessment, for example:

• Bonus
• Commission
• Overtime
• Self-employed income
• Temporary allowances
• Public benefits
• Rental income

The bank may look at whether an income is stable and sufficiently documented. So it is not certain that all income counts in full.

According to the guidance on the good practice rules (god skik) for home loans, your own contribution to an employer-administered pension scheme and the employer's pension contribution are not included in annual income before tax in this calculation.^[1]

It is a detail that can create a difference between your own quick calculation and the bank's figures.

Debt-to-income ratio when you buy together

When you buy a home together, the bank normally looks at the household's combined income and debt.

A couple has the following finances:

The calculation is:

3.600.000 kr. ÷ 900.000 kr. = 4,0

If one of you has student loan debt or a car loan, that debt still counts in the household's overall picture.

If only one of you is buying or is liable for the loan, the calculation may look different. The bank assesses the legal and financial liability in the specific case.

What does a debt-to-income ratio of 4 mean?

A debt-to-income ratio of 4 means that the debt is four times as large as annual income before tax.

The Danish FSA generally regards a debt-to-income ratio of more than 4 as high. That does not mean 4 is a universal maximum for all home buyers.^[1]

Instead, it means that the combination of debt, income, loan-to-value ratio, net worth (formue) and loan type calls for closer attention.

Two buyers with a debt-to-income ratio of 4,3 can get different answers, because their finances are not the same.

One may have:

• Substantial savings left after the purchase
• High disposable income
• A fixed and stable income
• A lower loan-to-value ratio

The other may have:

• Little in savings left
• Several expensive loans
• Stretched disposable income
• A high loan-to-value ratio

The debt-to-income ratio is the same. The resilience is not.

Is a debt-to-income ratio of 4 a fixed limit?

No.

The rules do not say that everyone with a debt-to-income ratio above 4 must automatically be turned down. The guidance also describes situations where a loan can be responsible after a specific assessment, even though the debt-to-income ratio is high.^[1]

It is therefore misleading to divide all home buyers into approved below 4 and rejected above 4.

The bank's assessment covers, among other things:

• Disposable income after buying the home
• Total net worth
• The size of the down payment
• Loan-to-value ratio
• Choice of loan
• Stability of income
• The household's other debt
• The home's price and location

Nor is there any documented general rule that the Danish FSA recommends a maximum debt-to-income ratio of 3,5 for everyone. That figure may appear in some banks' own calculations or rules of thumb, but it must not be presented as a common official limit.

High debt-to-income ratio and choice of loan

The good practice rules for home loans generally restrict risky mortgage loans and mortgage-like loans when both the debt-to-income ratio and the loan-to-value ratio are high.^[2]

This can affect options such as:

• Variable (adjustable) rate
• Interest-only period (afdragsfrihed)
• The combination of a variable rate and an interest-only period

It does not mean that everyone with a debt-to-income ratio above 4 can only choose one particular loan type. It depends on the loan's risk profile, the loan-to-value ratio and the bank's specific assessment.

A high debt-to-income ratio can therefore affect more than the loan amount itself. It can also affect which financing models the bank is willing to make available.

Debt-to-income ratio and growth areas

The Danish FSA's growth area guidance applies to home lending in areas where large price increases have led to particular attention on the resilience of household finances. The growth areas cover Copenhagen and its surrounding area and Aarhus.^[3]

Here, the guidance describes, as a general rule, that net worth must be able to remain positive in a hypothetical price fall:

• With a debt-to-income ratio between 4 and 5, a price fall of 10 per cent is used.
• With a debt-to-income ratio above 5, a price fall of 25 per cent is used.

It is a calculation of resilience. It is not a forecast that the home will fall in value, and it is not a requirement that you must sell.

The guidance contains exceptions and scope for other compensating factors. So 10 per cent and 25 per cent should not be described as a general legal requirement that applies equally to all home buyers across the whole country.

The full calculation is explained in the supporting guide on the debt-to-income ratio and the bank's net worth stress test.

The debt-to-income ratio shows the debt, not the purchase price

This is an important difference.

The debt-to-income ratio tells you how large your total debt can be relative to your income. It does not directly tell you how expensive a home you can buy.

If you want to see how much total debt a particular ratio corresponds to, you can turn the formula around:

Annual income before tax × debt-to-income ratio = total debt

A household with a combined annual income of 800.000 kr. gets these mathematical amounts:

If the household already has 200.000 kr. in student loan debt and car loans, that amount is part of the total debt.

At a debt-to-income ratio of 4, the mathematical room for new housing debt is therefore:

3.200.000 kr. less 200.000 kr. = 3.000.000 kr.

But the 3.000.000 kr. is the debt. Not necessarily the price of the home.

Your possible purchase budget can roughly be set out like this:

New housing debt + your own money towards the purchase price = possible purchase price

If the debt-to-income calculation leaves room for 3.000.000 kr. in debt, and you can put 3.000.000 kr. of your own directly into the purchase price, the mathematical purchase budget becomes:

3.000.000 kr. in debt + 3.000.000 kr. of your own money = 6.000.000 kr.

This assumes that you have no other debt that must be deducted from the debt limit. It also assumes that the 3.000.000 kr. can actually be used on the purchase price.

If you have 3.000.000 kr. in total savings, part of it may need to go on land registration (tinglysning), loan costs, help from professionals, moving and the buffer you want to keep. That part cannot also go into the price of the home.

So the purchase budget can end up both higher and lower than the debt amount given by the debt-to-income ratio:

• It can be higher when you add your own money on top of the debt.
• It can be lower if disposable income cannot cover the monthly housing costs.
• It can be lower if existing debt uses up part of the debt limit.
• It can be lower if part of your savings has to cover costs and a buffer.

In other words, the debt-to-income ratio sets a possible ceiling for the debt. Disposable income, the down payment, the costs and the rest of your finances determine what the ceiling for the price of the home itself will be.

The debt-to-income ratio does not stand alone

A household's housing finances can look strong on one figure and stretched on another.

The debt-to-income ratio should be seen together with:

Disposable income

Disposable income shows what you have left each month once fixed expenses are paid. A home can fit within the debt-to-income ratio and still leave too little room in everyday life.

Read the full guide on disposable income when buying a home.

Net worth

Net worth is the difference between your assets and your debt. It can be particularly important when the debt-to-income ratio is high.

Read more about net worth in the bank's assessment.

Down payment and loan-to-value ratio

A larger own contribution can reduce the need for new borrowing. But the bank also looks at whether there is money left for costs and a buffer after the purchase.

Your overall monthly finances

Interest, repayments (afdrag), property taxes, insurance and maintenance must fit within the budget. The debt-to-income ratio does not tell you what those items will be.

You can see how it all fits together in the guide on the four pillars of your home finances.

What can change your debt-to-income ratio?

The ratio changes when the debt, or the income the bank can take into account, changes.

Here are three worked examples:

Lower total debt

• Annual income: 700.000 kr.
• Debt before the change: 2.940.000 kr.
• Debt-to-income ratio: 4,2

If the total debt is instead 2.800.000 kr., the ratio becomes:

2.800.000 kr. ÷ 700.000 kr. = 4,0

Higher documented income

• Debt: 3.000.000 kr.
• Annual income before the change: 700.000 kr.
• Debt-to-income ratio: 4,29

If the income the bank can take into account is 750.000 kr., the ratio becomes:

3.000.000 kr. ÷ 750.000 kr. = 4,0

A different home price

A lower financing need gives lower total debt. But the difference in purchase price is not necessarily equal to the difference in debt, because the down payment and purchase costs also play a part.

The examples show the maths. They do not tell you which solution suits a particular buyer.

What information does the bank use?

To work out the debt-to-income ratio, the bank will typically use documentation of:

• Salary and other income
• Student loan debt
• Car loans and consumer loans
• Credit cards and overdrafts
• Outstanding debt from a previous home
• Savings and other assets
• The expected financing of the new home

If a loan is to be paid off in connection with the purchase, the bank must be able to see when and how that happens. If an income is variable, the bank may ask for documentation covering a longer period.

An accurate calculation makes it easier to understand the difference between your own estimate and the bank's calculation.

Common misunderstandings about the debt-to-income ratio

Everything below 4 is automatically approved

No. Disposable income, net worth, down payment and the rest of your finances can still limit the home purchase.

Everything above 4 is automatically rejected

No. Above 4 is generally regarded as a high debt-to-income ratio, but the bank carries out a specific assessment.

Only the new home loan counts

No. Existing debt such as student loan debt, car loans and consumer loans is also included.

The debt-to-income ratio and the loan-to-value ratio are the same thing

No. The debt-to-income ratio compares debt with income. The loan-to-value ratio compares loans with the home's value.

The debt-to-income ratio shows the monthly cost

No. Two loans of the same size can have different interest rates, repayments and monthly payments.

The limit of 3,5 comes from the Danish FSA

The limit of 3,5 is the banks' own benchmark and does not apply to every home buyer. Do not confuse it with the official threshold for when a debt-to-income ratio is generally regarded as high.

In short

The debt-to-income ratio is a simple calculation. It is the interpretation that calls for nuance.

A ratio above 4 is generally regarded as high. It is not an automatic no. The bank looks at whether your overall finances can support the home purchase, and whether the combination of debt, net worth, disposable income, loan-to-value ratio and loan type is responsible.

Once you know your figure, you know which question the bank is trying to answer. Not just how much you owe, but how large the debt is relative to the income that has to carry it.

Work out your ratio in the debt-to-income ratio calculator.

BoligKlar gives you a second pair of eyes and an overview. The bank carries out the final credit assessment (kreditvurdering) and decides which financing it will offer.

Frequently asked questions