Real estate loan: calculating its sustainable debt level

Did you know ? When you buy a mortgage, you are subject to a glass ceiling: the debt ratio authorized by the bank.

This cap is used to calculate the amount of your monthly payments and, as a corollary, your borrowing period and the maximum amount you can claim. What is this ceiling? Should we rely on it to know how much it is possible to borrow? And what is a debt level considered “bearable”?

Real estate credit: the limit of 33% of indebtedness …

If you’ve done research on real estate loans, this percentage is probably not unknown to you. 33% is the threshold of debt that banks are reluctant to cross. It is commonly considered that it is not reasonable to have a level of debt that goes beyond this symbolic threshold. This is roughly a third of the borrower’s income.

It is calculated taking into account two criteria:

• The household’s cumulative monthly net income (salaries, bonuses, benefits, profits, property income, pensions, allowances, etc.);
• The fixed charges that must be deducted from these incomes (for example, for a couple who already reimburses a car loan, or for a borrower who pays child support).
From the sum obtained, it is estimated that a maximum of 33% can be injected into the repayment of mortgage payments. For a couple whose combined income amounts to 3,000 euros, the monthly threshold not to exceed will be 990 euros. This limit allows the bank to protect itself against a possible default of repayment.
This rate therefore determines the debt capacity of the borrower or borrowers. Primordial, it conditions the obtaining of the mortgage loan in its entirety, as well as the budget of acquisition.

… But a flexible limit depending on the case

However, things are never so simple when talking about home equity. It should be qualified: we should rather say that banks are most reluctant to exceed the rate of 33%. Because, in fact, lending institutions rely on another criterion: the level of debt acceptable, based on the “left to live”.

This means that you can modulate your debt ratio, upwards, if you have high incomes … or down, if, conversely, you are earning modest incomes. The threshold of 33% is therefore not fixed. In the first case, the rate can easily exceed one-third of revenues, and even go up to 40%. In the second case, this same rate can be reduced to 30%.

The difference is the “rest to live”, that is to say the financial resources you have once your monthly mortgage payment paid. It is obvious that it is easier to ensure everyday life with a significant amount of life. A borrower with high incomes (10,000 euros per month) can therefore live very well despite his debt ratio of 40%, while a low-income borrower (1,500 euros) will have difficulties beyond 30% of debt.

Taking into account the level of debt supportable

It is important to understand that the criterion of the remainder to be lived makes it possible to determine the level of debt “bearable”, that is to say the threshold not to exceed so that the borrower can enjoy the necessary day-to-day . This is the key factor for the bank, which ensures that:

• You can keep sufficient financial resources to live comfortably;
• You had no trouble repaying your monthly mortgage payments.

The bank’s calculation will therefore be largely interested: it first wants to protect its investment and guarantee repayment of the capital granted. For this reason, the level of sustainable debt is a limit that each borrower must know how to set himself, in agreement with his lending institution, but especially consistent with its monthly needs.

It’s up to you to determine how much you can pay back each month without getting into trouble. It’s up to you to set your own level of sustainable debt. And if the acceptable rate, in your case, is 25% or 20%, it is better to stay within reasonable limits. The weight of your mortgage must not stop you from living!