In this article, we guide you through the determining factors for accurately estimating your borrowing capacity, and we give you the keys to maximizing your chances of obtaining a favorable mortgage.
Definition of borrowing capacity
It is calculated taking into account the maximum debt ratio generally accepted by banks, i.e. 35% of net income.
This concept is essential because it allows us to define a threshold beyond which a household risks encountering financial difficulties in meeting its monthly repayments while maintaining its standard of living. It is therefore a key measure in risk management for both the borrower and the bank.
Formula for calculating borrowing capacity
To calculate your borrowing capacity, you need to estimate the maximum monthly payment you can repay. The formula is therefore simple:
The formula mentioned above does not take into account the interest rate or borrower insurance premiums. It provides a rough estimate based on expenses and income.
Why calculate borrowing capacity?
Calculating your borrowing capacity is a crucial step in any real estate project, as it allows you to determine how much you can borrow without putting yourself in financial difficulty.
This not only avoids disappointment when looking for properties that are out of reach, but also helps reassure banks about your solvency.
Anticipating this capacity helps you better prepare for your purchasing goals by taking into account parameters such as loan term, interest rates and insurance conditions.
They favor stable income such as the salary of a permanent employee, which is taken into account at 100%.
For liberal professions or the self-employed, banks calculate a monthly average based on annual income over several years.
Replacement income such as unemployment or disability benefits may be excluded or partially taken into account.
Rental income is taken into account up to 70% to compensate for the risk of rental vacancy. Likewise, exceptional bonuses or incentives may be taken into account if they are recurring and not random.
Banks will assess your remaining income , which is the amount remaining after paying all fixed costs, to ensure you have enough to maintain a comfortable standard of living.
Maximum borrowing capacity and debt ratio
To determine your maximum borrowing capacity, start by calculating the maximum monthly payment amount you can afford based on your income and monthly expenses.
This ratio between these two amounts is commonly referred to as the debt ratio. Banks use it as one of the primary criteria for assessing a buyer’s borrowing capacity
According to the recommendations of the High Council for Financial Stability (HCSF), it is generally set at a maximum of 35%. It determines the portion of the monthly budget that a buyer can allocate to repaying their loan. The debt ratio takes into account not only income, but also fixed expenses, in order to define the maximum monthly payment that can be repaid.
You don’t have any other outstanding credit? Or alimony? You can then immediately find out your approximate monthly payments:
Maximum borrowing capacity = maximum monthly payment x duration in months
By taking into consideration your income, the maximum debt ratio and the duration of your loan, you have been able to draw up an initial estimate of your borrowing capacity.
Real estate loan simulations
If you earn 2,000 euros per month, your borrowing capacity depends on several factors, including the loan term and the interest rate.
For example, a 20-year loan at 1.5% allows you to borrow much more than a loan for the same amount but with a 3% interest rate.
Borrowing capacity and remaining income
In addition to the debt ratio, banks are interested in what is left to live on: “what is left to live on” refers to the amount remaining in your budget for usual, everyday expenses: food, transport, clothing, etc.
It is generally recommended that a household maintain a minimum living allowance. This amount ranges from €700 to €1,000 for a single person, €1,200 to €1,500 for a couple, and €400 for each additional dependent.
It can be built up from a PEL (Home Savings Plan), a gift or a family loan or even personal savings built up over the years.
For the bank, the contribution is valuable and will be considered as intended to cover associated costs, such as notary and guarantee fees.
In response to a recommendation from the HCSF (Higher Social Security Fund), banks are favoring loans with personal contributions more than ever.
Thus, it is recommended to provide a contribution equivalent to at least 10% of the purchase price. If your contribution exceeds this percentage, you may consider reducing the loan term or borrowing more.
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