What is Debt-To-Burden Ratio & Know How to Calculate It in UAE?

Feb 23, 2023

What is Debt-To-Burden Ratio & Know How to Calculate It in UAE?
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To obtain a mortgage for a property in the UAE, you must meet specific qualifying criteria and conditions, such as having a good credit history, a minimum monthly income of AED 15,000, and a maximum loan period of 25 years with a maximum LTV of 50-80%. Additionally, banks consider the debt-to-burden ratio (DBR), internationally called debt-to-income ratio (DTI), a crucial factor when approving your home loan.


So what is the debt-to-burden ratio?

The debt-to-burden ratio assesses the proportion of your monthly income that goes towards paying your expenses (including loans and credit card installments). Banks use this measure to determine your loan and credit card eligibility based on your current obligations and ability to repay them. While each bank has its requirements for loan approval, certain factors, such as credit score and debt-to-income ratio, are commonly used by all banks in evaluating eligibility.

The UAE Central Bank mandates that to be eligible for a mortgage, your Debt-to-Burden Ratio (DBR) must not surpass 50%, indicating that debt payments cannot consume over 50% of your income. A debt-to-income ratio between 20-35% is generally considered favourable for a home loan, while a ratio exceeding 35% is viewed as risky by most home loan lenders. 


How to calculate the debt-to-burden ratio?

The DBR is determined as the ratio of the total debt owed by the applicant to the total assets owned by the applicant. In other terms, it is the ratio of your loans to your average monthly income.

Debt-to-burden= Total debt/total income

If your Debt-to-Burden Ratio is below 50%, you may qualify for additional financing, although final approval is always at the discretion of the bank. The lower the score, the greater your chances of being approved for a loan or credit card.

The calculation of your Debt-to-Burden Ratio can be done quickly by taking the ratio of your monthly expenses to your monthly income. 

For instance, if a person earns a monthly salary of AED 15000 and has some monthly liabilities to be attended to, we can determine his Debt-to-Burden by performing the calculation.

Monthly Rent = AED 5000

Car Loan = AED 3000

Personal loan Installment = AED 1800

Debt-to-burden = Total debt/total income

Total Debts = 5000 + 3000 + 1800 = 9800

Monthly income = 20000

Debt-to-burden = 9800/20000 = 49%

This person is qualified for a new loan because his DBR is 49%, which is less than the 50% restriction. However, we can see that it is near the maximum limit. This is sufficient for the time being. However, if he obtains a new loan, this will undoubtedly surpass 50%, and he will be ineligible for another loan unless part of the load is reduced.


Why is it important to calculate the debt-to-burden ratio? 

To apply for a personal loan in the United Arab Emirates, applicants are now required to provide a comprehensive set of supporting documents including salary certificates, bank statements, and any additional proof requested by the bank. 

The purpose of these documents is for the bank to evaluate the applicant's ability to repay the loan by determining their debt-to-burden ratio. If the ratio is less than or equal to 50%, the loan is approved; otherwise, the loan is declined. Banks are becoming increasingly strict in their requirement for these documents to minimize the risk of loan default.


Debt-to-Burden Loan Limit in the UAE

In the UAE, until a decade ago, there was no requirement to maintain a specific Debt-to-Burden Ratio for loan eligibility. Banks would grant loans to applicants with DBR scores around 65%. This 65% threshold was considered a lenient limit, and many candidates could easily maintain a DBR below 65% and be eligible for loans. However, if an applicant's DBR exceeded 65%, they were not eligible for any type of loan. 

In the past, banks relied solely on bank statements as supporting documents when making loans. This often resulted in clients defaulting on their loans and banks losing money. Additionally, when consumers took out loans from multiple banks simultaneously, their Debt-to-Burden Ratio increased as the monthly interest on their debts frequently exceeded their income. In light of these considerations, most banks have now reduced the DBR to 50% AND have started implementing stricter standards and taking into account the applicant's debt-to-burden ratio.


How can you improve your debt-to-burden ratio? 

We recommend that you do the following to enhance your debt-burden ratio:

    • Maintain your monthly interest payments and make an effort to progressively lower your loan balance.
    • Explore the option of consolidating debt by transferring certain low-interest loans.
    • Aim to make an effort to enhance your monthly income. 
    • Make an effort to repay loans as soon as possible.


Final words

The primary objective of a bank is to secure its assets, which mainly consist of loans. To safeguard these assets, as per the regulations of the UAE Central Bank, banks aim to restrict their loan exposure to a single individual. The debt-to-burden ratio (DBR) provides banks with a precise evaluation of a person's ability to repay the loan or the equated monthly installments (EMIs).

To learn more, reach out to our financial experts and discover the most suitable credit cards and loans for your needs using our amazing calculators

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