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Real Estate Credit: How to calculate your debt ratio?
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Real Estate Credit: How to calculate your debt ratio?

12 January 2022

To take out a mortgage, one of the first steps to follow is to calculate your debt ratio .

It is this parameter that will allow you to calmly repay your monthly payments throughout the duration of the credit.

Calculating your debt ratio can turn out to be relatively technical: in this article we show you all the calculation methods to fully control your debt ratio.

How to calculate your debt ratio in 2022?

The debt ratio for a mortgage represents the ratio of your fixed charges compared to your monthly income . It is presented as a percentage and is calculated monthly. So remember this formula, if you have a real estate project in Collioure for example:

Debt ratio = Net expenses / income x 100

The parameters of the debt ratio

To define the first parameter, add up all your fixed charges. They include your current loans, any pensions you pay, etc.

Net income is obtained by adding all of your monthly income. They include your salaries, but also your aid, pensions and rents received, etc.

It is not always easy to know which data to take into account or not.

Here is a summary of the elements to include or exclude to calculate the debt ratio for a mortgage .

To include :

  • Net wages
  • Contractual premiums
  • The 13th month
  • Non-salaried professional income
  • Commissions according to seniority in the function

To exclude

  • Exceptional non-contractual bonuses
  • Professional allowances
  • (work accident, occupational disease, etc.)
  • Alimony received (by court decision).
  • Other pensions (retirement, disability, etc.)
  • Housing allowances (APL)

Analyze your debt ratio

You got your debt ratio, but what does it mean?

Less than or equal to 33%

You are in debt . This means that you have taken out one or more loans and that the monthly payments have been made without incident. Know that 33% is the ideal debt ratio because it generally represents the debt threshold of banks.

If you want to buy an apartment in Collioure or elsewhere, this is the ideal rate.

In other words, the threshold beyond which the banks do not go.

Between 33% and 55%

You are badly in debt . This means that in managing your personal budget, your expenses exceed your income. You can consider buying back your credits to remedy this situation and have a lasting solution.

Greater than 55%

You are over-indebted . In this case, you are unable to repay one or all of your loans and you face several payment incidents such as charges or late penalties.

Note, however, that this positioning may only be “passive”, following a divorce or a period of unemployment for example.

What is the maximum debt ratio authorized in 2022?

Since January 1, 2022, the High Council for Financial Stability (HCSF) has ruled that the effort rate for mortgage borrowers is limited to a maximum of 35% .

By setting this threshold, the HCSF wishes to avoid the situation of household over-indebtedness . The duration of the loan is also affected.

From now on, repayment will have to be made over 25 years, with a maximum grace period of two years. This additional period concerns:

  • Households who have a start-up of the property that is delayed in relation to the granting
  • credit
  • Individuals who buy an off-plan property (sale in the future state of completion or
  • VEFA)
  • Individuals who have work to do before they can move in (under
  • conditions)

Banks no longer have the possibility of granting loans for a term of more than 25 years.

But to keep a certain flexibility, financial institutions may waive this criterion for 20% of mortgage loans. So even if your income or contributions are low, you should still be able to borrow.

How to negotiate a higher debt ratio?

Do you have a debt ratio for a mortgage greater than 33% and you want to invest? Here are 3 keys to better negotiating.

1. Highlight your borrower profile

Our first advice is to put forward your good management of your accounts. It is reassuring for a bank to see that you have no overdrafts, no payment incidents, no outstanding consumer credit or even spending beyond your means.

It is therefore essential to keep a remainder to live allowing you to maintain a certain financial ease. In some cases, even if your monthly income is significant, you can still find yourself with a debt ratio of over 33% .

Let's take an example. If your monthly income is € 10,000 and you repay € 3,500 monthly (or 35%), your remaining amount is € 6,500. You can therefore highlight your high income or the possession of a significant heritage.

2. Play the competition or contact a mortgage broker

To negotiate the best offer, we advise you to consult several banks and then to assert the competition, with supporting evidence.

This work is tedious but allows you to support your negotiation in a very concrete way. You can also consider using a broker.

His role will be to negotiate for you with the banks. Often, you will have access to attractive conditions, particularly in terms of interest rates and other costs.

3. Carry out a loan repurchase

It's a simple and effective way to increase your borrowing capacity. Paying off one of your current loans in advance will allow you to no longer have to pay the amount of monthly payments on this loan.

By using part of your savings to repurchase a loan in advance, you will gain leeway for your future monthly mortgage payments.

When you want to take out a loan, calculating the debt ratio is essential . You will be able to have a clear visibility on your remainder to live, and to arrange your budget according to this important parameter.

Do you have a real estate project in Collioure ? Our advisers are there to guide you.

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